Preliminary figures released on Wednesday showed that there was an expansion business activity in the euro area in March. However, any recovery could be derailed by a third wave of the pandemic in the region even as infections of Covid-19 are rising.

Compared to 48.1 in February, the IHS Markit’s flash composite PMI for the euro zone, which is a measure of activity for both the manufacturing and services sectors, increased to 52.5 in March. There is technically an expansion in business activity if the reading is above 50.

This is the first business activity expansion in the region since September last year and the largest increase since July last year.

“The eurozone economy beat expectations in March, showing a much better than anticipated expansion thanks mainly to a record surge in manufacturing output,” Chris Williamson, chief business economist at IHS Markit, said in a statement.

The increased economic performance for4 March has primarily been driven by the manufacturing sector while there has also been an improvement in the services sector which has been severely hit by the pandemic, as it reached a seven month high.

But with continued social restrictions across the euro zone still present to curb the spread of a possible third wave of the pandemic, presents s serious threat to economic recovery of the region. He lockdown in Germany was extended earlier this week while strict restrictions were imposed during the Easter weekend in the country. Rising cases of infections have also resulted in imposition of lockdown in Paris and about 14 other regions in France. Tougher restrictions on movement have also been imposed in Poland.

“The outlook has deteriorated, however, amid rising COVID-19 infection rates and new lockdown measures. This two-speed nature of the economy will therefore likely persist for some time to come, as manufacturers benefit from a recovery in global demand but consumer-facing service companies remain constrained by social distancing restrictions,” Williamson said.

En estimate of the euro zone achieving a 4 per cent GDP growth in 2021 and a 4.1 per cent growth in 2020 was made earlier this month by the European Central Bank. Bur the estimation is dependent on the path the pandemic takes in the region as well as the speed of inoculation against Covid-19 in Europe.

France saw a growth in business activity that was its highest kin three months even though the country’s economy is in a contraction. France’s flash composite output index stood at 49.5 in March, from 47.0 in February.

“Activity trended towards stabilization, reversing the downward momentum seen in January and February … That said, there remain ongoing challenges related to the pandemic,” Eliot Kerr, an economist at IHS Markit, said in a statement.

“Firstly, raw material shortages continued to drive costs sharply higher, which may act as a squeeze on profit margins until the recovery in demand conditions gathers pace. Secondly, the threat of setbacks to the reopening of the economy remains tangible,” he said.

The manufacturing sector in Germany continued to perform well and add on to the economy of Europe. Germany’s flash composite output index rose to 56.8 from 51.1 in February, representing a 37-month high.

“The sustained upturn in the factory sector has seen the manufacturing PMI reach unprecedented heights, with growth in global demand for German goods showing no signs of abating and businesses reporting that previously-delayed investments are now being realized,” Phil Smith, associate director at IHS Markit, said in a statement.

(Adapted from CNBC.com)