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Service sector activity slumps, manufacturing almost stalls as
Brexit issues exacerbate pandemic woes. Both sectors suffer falling
exports
Prices rise, often linked to worsening supply
The UK economy is on course to contract sharply in the first
quarter of 2021 as the country struggles through a third national
lockdown, meaning a double-dip recession is on the cards. Services
have once again been especially hard hit, but manufacturing has
seen growth almost stall, blamed on a cocktail of coronavirus
disease 2019 (COVID-19) and Brexit, which have led to increasingly
widespread supply delays, rising costs and falling exports.
Encouragingly, the current downturn looks far less severe than
that seen during the first national lockdown, and businesses have
become increasingly optimistic about the outlook, thanks mainly to
progress in rolling out COVID-19 vaccines. Business hopes for the
year ahead have risen to the highest for over six and a half years,
boding well for the economy to return to solid growth once virus
restrictions ease.
PMI signals steep decline
The headline index from the survey, the seasonally adjusted IHS
Markit/CIPS Flash UK Composite PMI - based on approximately 85% of
usual monthly replies, slumped from 50.4 in December to 40.6 in
January, its lowest since May of last year and falling below the
50.0 no-change mark to indicate a renewed, steep, contraction of
business activity. With the exception of the March through to May
period of last year, the latest reading was the lowest since
February 2009.
Job losses gather pace again
The fall in the headline output index was accompanied by a
similar sharp drop in new orders, which deteriorated in January at
the fastest rate since last May, and also prompted firms to cut
jobs at an increased rate. The pace of job losses had eased in
December to the lowest since the pandemic struck, but January saw
companies reduce headcounts at a quicker rate - albeit less so than
seen between March and November. The steepest loss of jobs was
recorded in the hotels, restaurants, travel and leisure
sectors.
Lockdown restrictions bite less than before
Lower output and falling demand was widely blamed on rising
virus infections and a tightening of COVID-19 lockdown measures.
Recent days have seen daily COVID-19 deaths rise to the highest yet
recorded in the UK, and January saw a new national lockdown
introduced in England, accompanying similar strict measures in the
rest of the UK. This lockdown replaced a tiered system of local
containment measures that had been in place in December, and now
includes school closures.
Manufacturing resilience
Importantly, unlike during the first wave of the pandemic in the
spring of 2020, many parts of the economy have remained open,
notably manufacturing and construction. Hence business activity has
not fallen as sharply as seen during the first lockdown. The
manufacturing output index in particular merely fell from 55.9 in
December to 50.3 in January, remaining marginally in expansion
territory. Although indicating a near-stalling of production
growth, and the weakest expansion since the recovery began in June,
this index remains far above the all-time low of 16.3 seen back in
April.
Strong manufacturing growth continued to be reported in
mechanical engineering, while electrical & electronic goods
producers and food & drink manufacturers also managed to
sustain growth. However, all other broad manufacturing sectors
suffered falling output, led by especially steep downturns for
textiles & clothing and timber & paper products.
Service sector hard hit, but less so than during first
lockdown
There is also evidence to suggest that some companies - and
households - have adapted their behaviour to better cope with
COVID-19 restrictions, meaning the recent impact on the service
sector has also so far been more muted than seen during the first
lockdown. The service sector activity index fell from 49.4 in
December to 38.8 in January, indicating the steepest contraction
since last May, but the current reading is considerably higher than
the low of 13.4 seen back in April 2020.
Some of the service sectors hardest hit by the lockdown in early
2020, such as hotels, restaurants and other consumer-facing
services, again reported especially steep downturns in January, but
to lesser degrees than last April. Similarly, output fell sharply
in transport services and financial services, and - to a lesser
extent - business-to-business services, though in all cases less so
than last April.
Export downturn exacerbates domestic slump
In addition to domestic demand being hit by new lockdown
measures, both manufacturing and service sector companies saw
exports fall in January, the former suffering the first such
decline since July while service sector exports fell for the
twelfth successive month, deteriorating at the fastest rate since
last May.
Export woes in part reflected falling demand overseas, in turn
often linked to further virus infection waves, though also
reflected a pay-back after pre-Brexit deal ordering boosted
overseas sales in the lead up to the end of the Brexit transition
period on 31st December, notably in manufacturing.
While 33% of manufacturers reporting a drop in exports linked
the decline directly to COVID-19, some 60% linked the decline to
Brexit.
In the service sector, of those companies reporting lower
overseas sales, 57% attributed the loss to COVID-19 while 40%
blamed Brexit.
UK supply chain delays second-highest on
record
Brexit was also associated with a further lengthening of
suppliers' delivery times, which exacerbated broader supply chain
issues, including a worldwide shortage of shipping containers.
January consequently saw the second-greatest lengthening of
suppliers' delivery times since the manufacturing PMI survey began
almost 30 years ago, with the incidence of delays exceeded only by
those seen last April, at the height of pandemic-related global
factory closures.
Prices rise at increased rate
Supplier price hikes and additional shipping fees led to further
upward pressure on manufacturers' input prices, which rose in
January at the sharpest rate for almost four years. Input costs in
the service sector rose at a slower rate, however, mainly
reflecting lower staff costs. However, both sectors saw prices
charged rise, with goods prices rising at the steepest rate since
February 2018 as higher costs were passed on to customers, while a
far more modest rise in service sector charges was nonetheless
significant in being the quickest increase since the start of the
pandemic.
Future looks brighter
Finally, although businesses face a tough first quarter,
prospects have brightened. The flash PMI index measuring business
expectations for the next 12 months rose in January to the highest
since May 2014. Continuing the trend seen in recent months, survey
respondents overwhelmingly attributed their positive business
expectations to a successful vaccine roll-out during 2021.
Chris Williamson, Chief Business Economist, IHS
Markit
Posted 22 January 2021 by Chris Williamson, Chief Business Economist, IHS Markit
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.
