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Flash UK composite PMI rises from 30.0 in May to 47.6 in June,
highest since February
Manufacturing output ticks up and decline in services activity
eases as COVID-19 restrictions are further eased, but demand
continues to fall
Job losses lowest since March
UK business activity came closer to stabilising in June,
according to provisional PMI survey data, boosting hopes that the
economy will return to growth in the third quarter after an
unprecedented downturn due to the coronavirus disease 2019
(COVID-19) pandemic.
Record PMI rise
The flash IHS Markit/CIPS composite PMI, based on around 80% of
normal replies received from the monthly surveys, showed a record
rise in points terms for a second consecutive month in June. The
headline index, measuring output of both manufacturing and
services, rose from 30.0 in May to 47.6, its highest since February
and up sharply since the all-time low of 13.8 plumbed in April at
the height of the COVID-19 lockdown.
Since April, the PMI has been buoyed by many businesses ramping
up activity or reopening after lockdown closures. Manufacturing
output even returned to growth after three months of continual
decline, while the service sector reported the smallest contraction
of output since February.
Notable order book gains were seen in the clothing sector, which
reported higher demand as high streets reopened, as well as among
suppliers of basic metals, chemicals and plastics, where new order
growth was linked to factories and construction firms increasingly
returning to work.
In services, welcome revivals in demand were seen in some
consumer-facing sectors and transportation, linked to the easing of
the lockdown and the reopening of retail.
Demand continues to fall
However, many firms continued to report falling demand as an
increasing dampener on business levels, often linked to households
and businesses tightening belts and consumer spending being hit by
the weakened job market. Overall new order inflows fell again in
June, led by export orders dropping particularly sharply again,
albeit registering the weakest contraction of overseas demand since
February.
Especially marked falls in demand and output were seen for
hotels and restaurants, which has been by far the hardest-hit
sector during the pandemic. New orders of transport goods
(including cars) and electrical and electronic goods also fell
especially sharply again, most likely reflecting reduced demand for
high-ticket items by households amid the ongoing uncertainty caused
by the pandemic.
Job losses ease
Other indicators from the survey showed employment continuing to
fall at a steep rate, albeit with job losses in both manufacturing
and services running at the lowest since March. The drop in
employment over the past four months has been on an unprecedented
scale, although the overall rate of decline eased back in June to
below the prior global financial crisis peak rate, helped in part
by some companies bringing furloughed employees back to work.
Business expectations for the year ahead meanwhile jumped to the
highest since February, having bottomed out back in March, as
increasing numbers of companies saw brighter prospects.
Rapid return to growth
The recent improvements in the PMI data add to signs that the
worst of the immediate economic impact from the COVID-19 pandemic
was felt in April and that the economy looks likely return to
growth in the third quarter, especially given the further planned
easing of the lockdown from 4th July.
However, while confidence is rising that the economy will return
to growth in the third quarter as the lockdown continues to ease,
longer term recovery prospects remain highly uncertain. Some of the
recent gains reflect short-term bounces as businesses returned to
work, but demand clearly remains weak, as indicated by a further
steep decline in backlogs of orders and an ongoing fall in new
orders. Many COVID-19 restrictions and social distancing measures
will also need to stay in place until an effective treatment or
vaccine is available, curbing demand in a variety of service
sectors in particular.
Uncertainty over recovery prospects and job prospects also mean
demand for many goods, especially non-essential big-ticket items,
is likely to remain weak for many months, with Brexit uncertainty
also continuing to cast a shadow over the economy.
Our forecasting team therefore expects the economy to contract
by 11.9% this year before expanding by a relatively modest 4.9% in
2021, which is far more cautious than the 15% surge anticipated in
2021 by the Bank of England.
Bank of England on hold for now
The improvement in the PMI data also add to our belief that the
Bank of England will hold off from further stimulus, either in the
form of more asset purchases and especially with any move into
negative interest rates, in the next few months. However, more QE
could well be on the cards if the UK were to be hit by a second
COVID-19 wave, triggering a second shutdown of consumer-facing
services and non-essential retail premises. Policymakers will also
be carefully monitoring the labour market, to see if the
termination of the Coronavirus Job Retention Scheme at the end of
October leads to a marked pick up in job losses, pushing the
unemployment rate higher.
Chris Williamson, Chief Business Economist, IHS
Markit
Tel: +44 207 260 2329
chris.williamson@ihsmarkit.com
Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.
