Euro zone business activity bounced back to growth in July as more parts of the economy that were locked down to curtail the spread of the coronavirus reopened and consumers emerged from their homes to return to work and spend money, a survey showed.
Over 15 million people across the world have been infected by the coronavirus but as the rate of infections has eased across much of Europe, governments have loosened restrictions.
That unleashing of pent-up demand pushed IHS Markit's flash Composite Purchasing Managers' Index (PMI), seen as a good indicator of economic health, to 54.8 in July from June's final reading of 48.5.
This marked its highest since mid-2018 and well ahead of the 51.1 median forecast in a Reuters poll.
"Companies across the euro area reported an encouraging start to the third quarter, with output growing at the fastest rate for just over two years in July as lockdowns continued to ease and economies reopened," said Chris Williamson, chief business economist at IHS Markit.
The headline index had been below the 50 mark which separates growth from contraction since March so a return to positive territory will be welcomed by policymakers and governments who have pumped trillions of euros into the economy.
European Union leaders reached a deal on a €750 billion pandemic recovery fund on Tuesday.
As European Central Bank monetary policy is expected to stay ultra-loose for a long time, optimism about the year ahead improved.
As demand increased firms cut their headcount at a shallower rate and purchasing managers were at their most optimistic since February, just before Europe began to feel the full brunt of the pandemic.
The new business index rose to 52.7 from 47, its highest reading since October 2018, suggesting the recovery would extend into August, but there are fears with jobs still being shed and coronavirus containment measures still in place the upswing could be derailed.
"Demand needs to continue to recover in coming months, but the fear is that increased unemployment and damaged balance sheets, plus the need for ongoing social distancing, are likely to hamper the recovery," Williamson said.
A PMI covering the bloc's dominant service industry, which was hardest hit by the government-imposed lockdowns, climbed above the breakeven mark, registering 55.1 compared to June's 48.3. That was its highest since mid-2018.
The Reuters poll had predicted a more modest recovery to 51.
But some of the resurgence in demand was driven by firms cutting prices for a fifth month, albeit at a shallower rate than in June. The output prices index rose to 48.1 from 46.3.
The manufacturing industry also returned to growth with the factory PMI rising to 51.1 from 47.4, its first time above breakeven since January 2019 and ahead of the 50 poll prediction. An index measuring output, which feeds into the Composite PMI, jumped to 54 from 48.9.
Part of the return to manufacturing growth was driven by an increase in new export orders - which includes trade between countries using the euro. It rose to 51.9 from 43.1, its highest since August 2018.