- UK services activity suffered heavily in March, as it the sector increasingly impacted by restrictive government measures, according to the purchasing managers’ survey. Unsurprisingly, the final PMI reading for March was weaker than the “flash” reading which covered the period 6-20 March. The later responses reflected the additional impact on to services activity that followed the UK lockdown on 23 March.
- The final services PMI was revised down to 34.5 from the “flash” reading of 35.7. This was down from 53.2 in February and was by far the lowest reading in the survey’s more than 23-year history. It was also the sharpest monthly drop on record.
- Furthermore, the PMI shows joint services and manufacturing output contracting in March at the fastest rate since the series started in January 1998. The index fell by a record 17.0 points to 36.0 (revised down from the flash reading of 37.1) from 53.0 in February.
- Even allowing for the fact that the purchasing managers’ survey can tend to overstate developments at times of significant changing economic and political circumstances, it is evident that the economy took a turn for the worse in March.
- Indeed, all elements of the services survey showed a marked deterioration in March. In particular, new business contracted at the fastest rate since the survey began in 1996, while confidence also deteriorated to a record low and jobs were cut at the fastest rate since June 2009.
- The marked decline in the services sector (and manufacturing jobs) reported by the purchasing managers in March highlights the importance of the Government’s Coronavirus Job Retention Scheme. On a positive note, the purchasing managers survey observed that there “were numerous reports from survey respondents that placing staff on furlough had helped to mitigate more widespread job losses in March”.
- There is no doubt that the UK is headed for significant contraction in the second quarter – EY ITEM Club’s current expectation is that GDP will decline around 12% quarter-on-quarter.
- EY ITEM Club expects GDP to contract 5.8% over 2020. There are clearly substantial downside risks, but we believe the economy can start to recover in the third quarter, and then see a further pick-up in activity late in the fourth quarter. This is on the assumption that coronavirus peaks during the second quarter and the Government starts to relax some of the restrictions on people’s movements and on business activity during the third quarter.
Howard Archer, chief economic advisor to the EY ITEM Club, comments:
The purchasing managers survey pointed to the services sector suffering record contraction in March as it was increasingly impacted by restrictive government measures. Specifically, the services PMI dropped to a record low of 34.5 in March; this was revised down from the “flash” reading of 35.7 and was down from 53.2 in February and a 16-month high of 53.9 in January. The previous record low for the services PMI seen during the 2008/9 financial crisis was 40.1 in November 2008.
Unsurprisingly, the final PMI reading for March was even weaker than the “flash” reading as the flash period covered the period 6-20 March. The later responses reflected the additional impact on services sector activity from the UK lockdown on 23 March.
March’s reading of 34.5 was substantially below the 50.0 level that indicates flat activity. To put it further into perspective, it also compares very poorly the services PMI lifetime (1996-2020) average of 54.9.
Markit reported “The slump in activity was almost exclusively linked by survey respondents to business shutdowns and cancelled orders in response to the coronavirus disease 2019.
With measures to halt the spread of the coronavirus causing footfall to slump, by far the steepest downturns in activity were signalled by hotels and restaurants and other leisure activities such as sports centres, gyms and hair salons. The initial impact of emergency public health measures was also reflected in record downturns in activity across transport & travel and the vast business-to-business services category.
The purchasing managers’ surveys indicate the economy suffered a downturn in March as coronavirus increasingly impacted, leading to increasing restrictions on activity. There was also an increasing hit from foreign demand as important export markets were also affected by coronavirus.
Specifically, the composite output index for manufacturing and services fell back to a record low of 36.0 in March (revised down from the “flash” reading of 37.1); this was the lowest level since the composite series started in January 1998. The previous low for the composite index was 38.1 in November 2008. March’s reading was down from 53.0 in March and 53.3 in January (which had been the highest level since September 2016). The 17.0 point drop between March and February was the sharpest decline in the survey’s history. The improved PMI’s at the start of 2020 had primarily been the consequence of reported improved willingness to spend by some companies, and business activity coming from reduced political uncertainties following December’s decisive General Election and greater near-term clarity on Brexit.
Again, unsurprisingly, the final composite output reading for March was weaker than the “flash” reading as the flash period covered the period 6-20 March. The later responses reflected the further impact on services activity from the UK lockdown on 23 March.
March’s reading of 36.0 was substantially below the 50.0 level that indicates flat activity.
All elements of the March services surveys were weaker
The March services survey showed substantial deterioration across the board, with the forward-looking indicators boding ill for activity in the second quarter.
Markit reported that the decline in services activity in March was broad-based across the sector, with only the technology services subcategory recording pockets of continued business expansion. Even before the lockdown, the Government had shut restaurants, pubs, cinemas, clubs gyms and other leisure businesses.
New business fell by a considerable margin (series started in 1996), primarily reflecting a slump in business and consumer spending in response to government measures.
Additionally, foreign orders fell at a record rate amid international travel restrictions and widespread business closures across Europe.
Confidence in future activity was the lowest since the series started in 1996.
Employment contracted at the sharpest rate since June 2009. It was reported that there was a mixture of hiring freezes and forced redundancies amid the slump in business activity seen during March. Significantly, a number of companies were reported to be placing staff on furlough, which appears to have softened the overall scale of job cuts recorded in the latest survey period.
Price pressures were markedly lower in the services sector in March. Input prices rose at the slowest rate for four years. Meanwhile, prices charged by services companies contracted for the first time since April 2015 as they sought to gain business in an increasingly difficult environment.