Press release

24 Jul 2020 London, GB

Flash purchasing managers survey indicates UK economic activity stepping up in July as lockdown restrictions eased – EY ITEM Club comments

The flash July purchasing managers surveys point to the economy changing up a gear at the start of the third quarter due to a further easing of lockdown restrictions.

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Related topics Growth
  • Encouragingly, the survey points to services activity improving substantially to its strongest level since for five years in July. Lagging services activity was the main factor causing UK GDP to only edge up 1.8% month-on-month in May after contracting 20.3% in March
  • The services PMI rose to a 60-month high of 56.6 in July from 47.1 in June, moving well above the 50.0 level that indicates expanding activity. The manufacturing PMI was up to a 16-month high of 53.6 from 50.1
  • The survey shows joint services and manufacturing output expanding for the first time since February and at the fastest rate since June 2015. Hard data has been indicating that the economy returned to expansion in May, albeit modestly. The composite output index rose to 57.1 in July from 47.7 in June, 30.0 in May and just 13.8 in April
  • New orders were reported to have seen a solid rebound in July, led by domestic demand, while confidence improved modestly
  • However, services and manufacturing jobs fell appreciably in July and at a faster rate than in June. This may prompt the Chancellor to think about further steps to support the labour market in the Autumn Budget
  • The July purchasing managers’ survey fuels hope that the economy will return to clear growth in the third quarter as it benefits from the progressive easing of lockdown restrictions. The EY ITEM Club suspects that consumer spending contracted around 20% quarter-on-quarter in the second quarter, thereby being a major factor in a likely record quarter-on-quarter GDP contraction

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

“The July ‘flash’ purchasing managers’ survey for the UK manufacturing and services sectors indicated that activity picked up significantly, building on the improvement in June and May from April’s lows.

“The composite output index for manufacturing and services rose to a 61-month high of 57.1 in July from 47.7 in June, 30.0 in May and an all-time low of 13.8 in April (the survey has been going for 22 years).

“July’s reading of 57.1 took the index substantially above the 50.0 level that indicates flat activity.

“The flash purchasing managers’ surveys point to the economy changing up a gear at the start of the third quarter as lockdown restrictions eased further.

“Markit said that survey respondents reported a gradual increase in business activity following the lockdown during the second quarter of 2020, helped by returns to work and a phased reopening of the wider UK economy. There were also some reports that clients had started to take a more long-term view when considering their spending plans.

“Forward-looking elements of the survey also showed improvement for a third successive month in July. In particular, a solid rebound in new orders was reported following four months of contraction. Domestic demand saw particular improvement.

“Confidence improved further in July, albeit modestly.

“However, employment continued to fall and at a faster rate than in June. This may prompt the Chancellor to take further steps to support the labour market in the Autumn Budget.

July services PMI points to pick-up in activity to 60-month high

Howard Archer continues: “Services activity grew for the first time since February in July and at the fastest rate for five years, according to the PMI. That said, hard data from the ONS show that services output grew 0.9% month-on-month in May, which lagged growth in the manufacturing and construction sectors by some way.

“The ‘flash’ services PMI rose to 56.6 in July from 47.1 in June, 29.0 in May and a record low of just 13.4 in April. It had previously weakened to April’s low of 13.4 from 35.7 in March, 53.2 in February and a 16-month high of 53.9 in January.

“July’s reading of 56.6 was well above the 50.0 level that indicates flat activity.

“The improvement in services activity was linked to the re-opening of companies’ own sites and their client sites.

“Even so, Markit reported: “Despite the restart of more parts of the service economy, especially leisure-related businesses, there were also reports that initial levels of demand had been weaker-than-expected. Concerns about the speed of recovery, as well as a strong upturn in non-staff costs, acted as a brake on employment numbers in July.”

Manufacturing PMI shows expansion at 16-month high in July

Howard Archer comments: “The ‘flash’ purchasing managers survey pointed to manufacturing expansion accelerating to a 16-month high in July after the sector eked out marginal growth in June for the first time since February. Hard data from the ONS show that manufacturing output grew 8.4% month-on-month in May after falling 24.4% in April.

“The PMI rose to 53.6 in July from 50.1 in June, 40.7 in May and a record low of 32.6 in April. It had previously fallen to April’s low from 48.0 in March and 51.7 in February, which had indicated the first expansion since April 2019.

“July’s reading of 53.6 took the PMI clearly above the 50.0 level which indicates unchanged activity.

“Output grew at the fastest rate since November 2017 reflecting sustained production after stoppages during the lockdown.”

Howard Archer adds: “New business rose for the first time in five months, benefitting from reopened supply chains and a recovery in customer demand from the height of the lockdown.

“Confidence in the sector rose to the highest level since September 2014.”