- While UK services activity lost a little momentum in February, following the sharp improvement in January, according to the Purchasing Managers’ Survey, it was still at its second best level since September 2018.
- Specifically, the services PMI eased back to 53.2 in February (revised from the ‘flash’ estimate of 53.3) after jumping to 53.9 in January from 50.0 in December and 49.3 in November.
- Reports suggest that services activity is benefiting from increased customer demand due to December’s election result and fewer Brexit uncertainties, as well as improved domestic economic activity. However, as well as a slowdown in services activity last month, there was also some slowing in new business growth, amid reports that the spread of coronavirus was creating a drop in sales overseas and tourism-related bookings, particularly to Asia.
- The composite output index for manufacturing and services edged down to 53.0 in February (revised down from the ‘flash’ estimate of 53.3) after rising to a 16-month high of 53.3 in January from the previous two months. Nevertheless, this still pointed to a second month of clear expansion and was at the second highest level since September 2018.
- The economy was expected to grow 0.4% quarter-on-quarter in the first quarter of 2020 but we have revised that estimate to 0.3% quarter-on-quarter due to some expected negative impact from the effects of the coronavirus outbreak on activity. We believe the hit to economic activity from coronavirus is likely to be significant in the second quarter.
- However, the impact of coronavirus on the UK economy should be temporary and the economy will bounce back once the virus eases.
- Nevertheless, business confidence is likely to have taken a renewed hit following the coronavirus’ impact on the domestic and global economies, which may remain in place due to continued uncertainties over the UK-EU relationship
Howard Archer, chief economic advisor to the EY ITEM Club, comments:
“The purchasing managers’ survey pointed to the services sector growing at a modestly reduced rate in February after a sharp improvement to a 16-month high in January. Even so, services activity in February was still at the second strongest level (after January) since September 2018.
“There continued to be widespread reports of a positive impact from reduced political uncertainties on businesses’ and consumers’ spending decisions.
“Specifically, the services PMI eased back to 53.2 in February (revised from the ‘flash’ estimate of 53.3) after jumping to 53.9 in January from 50.0 in December and 49.3 in November.
“February’s reading of 53.2 was well above 50.0 (indicating flat activity), however, it was below the services PMI lifetime (1996-2020) average of 54.9.
February shows continued expansion
“The purchasing managers’ surveys indicate slightly slower but clear expansion in February. There continued to be reports that a lift to client willingness to spend and business activity was coming from reduced political uncertainties following December’s decisive election and greater near-term clarity on Brexit with the UK leaving the EU on 31 January with a deal.
“Specifically, the composite output index for manufacturing and services edged down to 53.0 in February (revised down from the “flash” estimate of 53.3) after rising markedly to a 16-month high of 53.3 in January from both December and November (the lowest level since July 2016). Nevertheless, February’s reading still pointed to a second month of clear expansion and was at the second highest level since September 2018.
“February’s reading of 53.0 was also well above 50.0 – the level that indicates flat activity.
“Additionally, the construction PMI improved markedly to a 14-month high of 52.6 in February from 48.4 in January, thereby marking the first expansion in the sector since last April.
“We had been expecting the economy to grow 0.4% quarter-on-quarter in the first quarter but we have trimmed that to 0.3% quarter-on-quarter due to some negative impact from coronavirus on activity.”
February surveys encouraging for future services activity
“The February services survey was generally still encouraging across the board even though it showed some ‘softening’ compared to January’s picture.
“There continued to be reports that services activity is benefiting from customer demand being lifted by reduced uncertainties following December’s election as well as greater near-term clarity over Brexit with the UK leaving the EU on 31 January with a deal. Improved domestic economic activity was also reported to be helping matters.
“New business expanded at a slower rate, largely due to a renewed fall in foreign orders as reports suggest that coronavirus was affecting sales to overseas markets, particularly in Asia. There was a drop in tourism-related bookings.
“Nevertheless, confidence in future activity was the highest since March 2015.Employment growth slowed and was marginal.
“Price pressures picked up in the services sector in February. Higher input costs were primarily attributed to rising staff salaries. Meanwhile, prices charged by services companies rose at the fastest rate since November 2017 as they looked to protect their margins.”