- The flash May purchasing managers survey points to manufacturing and services activity contracting at a very sharp rate, despite improving from April’s record low levels. There were some reports of activity in manufacturing being helped by initiatives to end factory shutdowns
- Consequently, while the May purchasing managers’ survey supports hope that UK economic activity should improve as lockdown restrictions are eased, it still leaves little doubt that the UK remains headed for substantial, record GDP contraction in the second quarter. The EY ITEM Club expects GDP contraction of around 15% quarter-on-quarter over the second quarter and around 8% over 2020. This assumes that there is a gradual further lifting of the lockdown restrictions over the coming weeks
- The survey shows the contraction in joint services and manufacturing output slowing in May from April’s record drop. Nevertheless, May’s decline was still the second fastest rate in the survey’s 22-year history. The index rose to 28.9 in May after falling to just 13.8 in April from 36.0 in March and 53.0 in February
- Forward-looking elements of the survey were also improved from April lows, but still at extremely weak levels. This suggests that the rate of contraction in activity will remain marked in the near term, with improvement clearly depending exactly on when and to what extent the Government further eases the lockdown measures over the coming weeks
- New business fell at the second fastest rate on record after April. Backlogs of work contracted significantly, while overall prices charged were cut again as many companies tried to secure business by discounting
- The ongoing sharp fall in services and manufacturing jobs reported by the purchasing managers in May supports the Government’s extension of the Coronavirus Job Retention Scheme through to October (with some flexibility to be built in from August)
Howard Archer, chief economic advisor to the EY ITEM Club, comments:
The May “flash” purchasing managers’ survey for the UK manufacturing and services sectors indicated that the economy contracted at an exceptionally sharp rate. However, activity did at least come clearly off the record level low suffered in April.
There were reports that activity was helped in May by some re-opening of companies amid the modest easing of lockdown restrictions.
Specifically, the composite output index for manufacturing and services rose to 28.9 in May after sinking to an all-time low of 13.8 in April from 36.0 in March (which had been the previous record low in the survey’s 22-year history). It had fallen to 36.0 in March from 53.0 in February and 53.3 in January (which had been the highest level since September 2016). This had meant that the composite output index for manufacturing and services output has dropped by 39.2 points over two months to 12.9 in April from 53.0 in February.
Nevertheless, May’s s reading of 28.9 was still significantly below the 50.0 level that indicates flat activity and was the second lowest on record.
While the May purchasing managers’ survey supports hope that UK economic will improve as lockdown restrictions are gradually eased, it still leaves little doubt that the UK remains headed for substantial, record GDP contraction in the second quarter – we expect GDP contraction around 15% quarter-on-quarter over the second quarter and around 8% over 2020. This assumes that there is a gradual further lifting of the lockdown over the coming weeks after some movement on 11 May.
Markit indicated that sharply contracting activity was due to business shutdowns, cancellations of customer orders and a general slump in demand amid the coronavirus disease 2019 (COVID-19) pandemic.
New business of works improved from April’s low but still recorded the second sharpest rate of contraction ever. Backlogs of work fell substantially but they were up from April’s record drops.
The fall in employment also increased and was the second sharpest ever after April’s record decline.
Overall prices charged were cut again in May as many companies tried to secure business by discounting.
Output expectations were still weak but did improve for a second month from the record low seen in March. There were stated concerns that customer demand would take a long time to recover to levels seen before the public health crisis, with some service sector companies reported to be deeply pessimistic about their near-term prospects.
May services PMI still points to substantial contraction but off April low
While services activity contraction slowed in May from April’s record drop, it was still easily the second sharpest drop since the series started in July 1996.
The “flash” PMI rose to 27.8 in May after deteriorating to a record low of just 13.4 in April from 35.7 in March, 53.2 in February and a 16-month high of 53.9 in January.
Around 55% of service providers reported a drop in business activity during May, while only 12% experienced a rise since April.
Markit reported “the service economy remains especially hard hit by the public health crisis, with travel, tourism and leisure firms often noting that business had slumped to zero”. Hotels and restaurants were also singled out.
Manufacturing PMI shows reduced contraction
The “flash” purchasing managers survey pointed to manufacturing activity contracting at a reduced but still considerable rate in May. There were some reports of activity being helped by initiatives to end factory shutdowns.
Specifically, the PMI rose to 40.6 in May after falling to a record low of 32.6 in April from 48.0 in March and 51.7 in February (which had indicated the first expansion since April 2019).
May’s reading of 40.6 kept the PMI markedly below the 50.0 level which indicates unchanged activity.
Output contracted despite the sub-index rising to 34.9 from just 16.3 in April.
Around 54% of manufacturing companies reported a fall in output during May, while 24% signalled an expansion since the previous month. Where manufacturing output growth was reported in May, this was often linked to healthcare-related products.
It was also reported that manufacturing output had been helped by some opening of supply chains. There were also reports of some improvement in demand from the construction sector.
However, there were widespread reports of a severe drop in customer demand during May. Producers of consumer goods such as clothing were among the hardest hit, reflecting virus containment measures.