Press release

5 Feb 2020 London, GB

Purchasing managers report UK services activity at 16-month high in January

An encouraging survey, not just that it shows a pick-up in UK services activity to a 16-month high in January, but also the forward-looking indicators boding well for future activity.

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  • An encouraging survey, not just that it shows a pick-up in UK services activity to a 16-month high in January, but also the forward-looking indicators boding well for future activity. The survey suggests that the service sector gained significant initial benefit from reduced uncertainties following December’s decisive election result and clarity over the UK leaving the EU. 
  • There were widespread reports of a positive impact from reduced political uncertainties on businesses and consumers’ spending decisions.
  • The composite output index for services and manufacturing climbed to a 16-month high of 53.3 in January (revised up from the “flash” estimate of 52.4) from 49.3 in both December and November, thereby indicating clear expansion after five months of flat or contracting activity.
  • It is notable that the first three “flash” readings for the services and manufacturing sectors have all been revised up in the final survey.
  • It does need to be taken into consideration that the purchasing managers’ surveys can tend to overstate developments at times of significant changing political circumstances, so the survey could possibly exaggerate the rebound in economic activity in January after overplaying some of the earlier weakness.
  • Nevertheless, the survey fuels EY ITEM Club’s belief that the economy could conceivably achieve GDP growth of 0.4% quarter-on-quarter in the first quarter of 2020, after likely stagnating at best in the fourth quarter of 2019.
  • The forward-looking indicators of the survey bode well for future activity. Increasing new business, higher employment and healthier confidence were all positives.
  • However, a concern for the economy is that the upside for business willingness to commit to investment and major projects may be limited by still significant concerns and uncertainties over the UK-EU relationship.
  • This may make it difficult for the economy to kick on after a likely pick-up in the early months.

Howard Archer, chief economic advisor to the EY ITEM Club, comments:

“The final purchasing managers survey pointed to the services sector growing in January at the fastest rate for 16 months, having been flat in December and contracted in November. There were widespread reports of a positive impact from reduced political uncertainties on businesses and consumers’ spending decisions.

“Specifically, the services PMI jumped rose to 53.9 in January (revised up from the “flash” estimate of 52.9) from 50.0 in December and 49.3 in November.

“January’s reading was well above the 50.0 level that indicates flat activity. However, to put it into perspective, it was still below the services PMI lifetime (1996-2020) average of 54.9.

Purchasing managers surveys point to economy seeing clear pick up in January 

“The purchasing managers’ surveys indicate a pick-up in activity in January amid reports that a lift had been provided by reduced political uncertainties following December’s decisive General Election and greater near-term clarity on Brexit.

“However, it does need to be taken into consideration that the purchasing managers’ surveys can tend to overstate developments at times of significant changing political circumstances, so the flash survey could possibly exaggerate the rebound in January after overplaying some of the earlier weakness. Nevertheless, the survey fuels our belief that the economy could well see GDP growth of 0.4% quarter-on-quarter in the first quarter of 2020 after likely stagnating at best in the fourth quarter of 2019.

“Specifically, the composite output index for services and manufacturing rose to a 16-month high of 52.3 in January (revised up from the “flash” estimate of 52.4) from 49.3 in both December and November (the lowest level since July 2016). It had been 50.0 in October.

“January’s reading of 53.3 was well above the 50.0 level that indicates flat activity and showed overall services and manufacturing output growing at the fastest rate for 16 months after five months of contracting or flat activity.

“Furthermore, the forward-looking indicators bode well for future. Joint orders were reported to have risen in January after five months of contraction and at the fastest rate since September 2018. There were widespread reports of a positive impact from reduced political uncertainties on businesses and consumers’ spending decisions. Output expectations rose to the highest since June 2015.

“Additionally, the construction PMI improved markedly to 48.4 in January from 44.4 in December. Although this still indicated contraction, it was the smallest fall since last May and modest.

Several elements of the January services surveys encouraging for future activity

“The January survey was generally improved across the board, boding well for services activity in the near term at least.

“New business expanded at the fastest rate since June 2018. There were reports of delayed orders going ahead following the decisive General Election result. Higher consumer spending and business investment were reported to have lifted orders.

“Overseas orders returned to growth, albeit marginal.

“Confidence in future activity was the highest since May 2015.

“Employment grew at the fastest rate for six months.”