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Flash UK composite PMI signals ongoing expansion but weakens
for second month to lowest since June
New orders show renewed fall despite pre-Brexit boost to
manufactured exports. Domestic demand shows signs of weakening,
notably for services
Employment continues to fall sharply
The UK's economic recovery lost momentum for a second successive
month in October, with companies reporting a renewed decline in
demand as new orders fell for the first time since June. The flash
IHS Markit/CIPS composite PMI, based on around 80% of normal
replies received from the monthly surveys, slumped from 56.5 in
September to 52.9 in October, a four-month low. Markets had been
expecting a reading of 53.9, according to Reuters.
Fourth quarter growth slowdown
Despite the decline, the PMI's composite output index remains at
a level historically consistent with GDP expanding at a quarterly
rate of approximately 0.3% at the start of the fourth quarter, but
the deterioration in new orders hints at the rate of expansion
weakening further in November, especially as fresh lockdown
measures to prevent the spread of COVID-19 are likely to impact
growing numbers of companies in coming weeks.
Fourth quarter GDP growth consequently looks likely to be far
weaker than the strong rebound seen in the third quarter, when the
PMI averaged 57.5.
Consumer-facing services struggle
The slowdown was led by the service sector, where growth of
business activity fell sharply compared to that seen in the prior
three months and new business inflows contracted for the first time
in four months. Activity in the restaurants & hotels sector
fell especially sharply for a second month running, slumping to an
extent not seen since May due to the ending of the government's Eat
Out to Help Out scheme and growing restrictions on recreational
activities, including enforced early evening closures of bars and
restaurants and tightened local lockdowns in some parts of the
country.
Similarly, transport services saw a steep drop in activity, as
did other personal and household service providers, often blamed on
resurgent COVID-19 restrictions and rising infection rates
deterring customers.
Encouragingly, robust growth continued to be recorded for
business-to-business services, IT & computing and financial
services.
Pre-Brexit boost to factories
Although manufacturing also continued to fare well, the rate of
growth of factory output and new orders slipped to the weakest seen
over the past four months. The weakened growth occurred despite
producers reporting strengthening demand for exports ahead of the
Brexit deadline at the end of the year, hinting at sluggish
domestic demand conditions.
New export orders rose to the greatest extent since February
2018, although one-in-four companies citing a reason for the
improvement directly attributed the increase to the advance buying
of safety stocks by overseas customers ahead of Brexit day on 31st
December. However, the increase in exports was largely confined to
food & drink, mechanical engineering products and basic metal
goods, the latter comprising mainly inputs sold to other
manufacturers.
A rising number of manufacturers meanwhile reported that worries
over Brexit led to increased stock piling of inputs. One-in-three
companies that reported higher input inventories cited Brexit as
the cause. However, overall stock levels continued to fall as many
other companies reported the need to reduce inventory holdings for
cost and cash flow considerations.
High rate of job losses persists
The renewed drop in inflows of orders meant backlogs of work
likewise fell, having briefly returned to growth in September.
Falling backlogs of work are usually a sign of excess capacity, so
it was no surprise to see employment levels cut once again in
October. Although the rate of job cutting eased slightly, down to
the lowest since March, the incidence of job losses remains higher
than at any time prior to the pandemic since the global financial
crisis.
Service sector jobs were cut particularly aggressively, albeit
to the least extent since March, though manufacturers reported a
renewed acceleration in job losses.
Job cuts were primarily blamed on the need for redundancies
resulting from COVID-19.
Subdued price pressures
A lack of demand was often cited as a cause of low pricing
power, and the October survey saw average prices charged for goods
and services broadly unchanged during the month, declining very
marginally. However, although charges levied for services fell for
a second successive month, prices charged for goods rose at the
fastest rate seen for ten months with raw material input prices
rising to an extent not seen since November 2018. The increase in
raw material prices hints at rising underlying inflationary
pressures for goods, and was often linked to supply shortages.
Supplier delivery times lengthened markedly during the month as
shortages for many inputs persisted.
Outlook
The slower growth of output, the renewed fall in demand and
further deterioration in the labour market suggest the economy
started the fourth quarter on a weakened footing. While Brexit
preparations may cause a short-term boost to the economy ahead of
31st December, rising COVID-19 cases and the imposition of local
lockdown measures bode ill for the near-term economic outlook.
While the fourth quarter still looks likely to see the economy
expand, the risk of a renewed downturn has risen.
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.
