Press release

5 Aug 2020 London, GB

Purchasing managers report pick-up in July services activity reaching 60-month high – EY ITEM Club comments

The final July purchasing managers survey points to services activity improving to a 60-month high. This was welcome news as lagging services activity was the main factor causing UK GDP to edge up only 1.8% month-on-month in May after contracting 20.3% in March.

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Related topics Growth COVID-19
  • Specifically, the services PMI rose to 56.5 in July (revised down marginally from the “flash” estimate of 56.6) from 47.1 in June, 29.0 in May and a record low of just 13.4 in April
  • The services sector seemingly benefitted from the partial re-opening of the hospitality sector and the easing of social distancing rules
  • Other elements of the services purchasing managers’ surveys largely showed marked improvement in July: new business grew for the first time since February and was at a six-month high, while confidence in future output rose to a five-month high
  • However, Markit reported that service providers commented on project cancellations and subdued underlying demand as businesses and households sought to rein in non-essential spending. This fuels concerns about longer-term recovery prospects
  • Services employment contracted at a deeper rate in July. This may prompt the Chancellor to think about further steps to support the labour market in the Autumn Budget
  • The improved July services and manufacturing purchasing managers’ surveys bolster hope that the economy will return to clear growth in the third quarter with expansion around 12% quarter-on-quarter as it benefits from reduced lockdown restrictions. This assumes that there are no further restrictions put in place. It is likely that the economy contracted around 20% quarter-on-quarter in the second quarter
  • The EY ITEM Club suspects growth is likely to slow in the fourth quarter as unemployment rises. The EY ITEM Club expects GDP to contract 11.5% over 2020
  • The EY ITEM Club sees GDP growth at 6.5% in 2021 as the recovery is limited by persistent consumer caution, higher unemployment and only slowly recovering business investment
  • The improved July services and manufacturing purchasing managers’ surveys reinforce belief that the Bank of England’s Monetary Policy Committee (MPC) is likely to ad0pt a “wait and see approach” at the August meeting (6 August) and keep interest rates unchanged at 0.10% and the planned stock of asset purchases at £745 billion

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

“Services activity grew for the first time since February in July and at the highest rate for five years, according to the PMI (although 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 services PMI rose to 56.5 in July (revised down marginally from the “flash” estimate of 56.6) 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 56.5 was well above the 50.0 level that indicates flat activity.

“Markit said that around 38% of services respondents reported an increase in business activity during July, while only 24% signalled a decline. Higher levels of business activity were overwhelmingly linked to the easing of lockdown measures and subsequent increase in customer demand.

“However, Markit also said that survey respondents often noted that output had simply risen from a very low base and would take a long time to recover to pre-pandemic levels. This ties in with concerns about the longer-term pace of recovery.

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

Most elements of the services survey saw substantial improvement in July

Howard Archer continues: “New services orders grew for the first time since February as they rose to a six-month high in July. Growth was mostly attributed to reopened business operations and a return of clients from furlough.

“Nevertheless, service providers  commented on project cancellations and subdued underlying demand as businesses and households sought to rein in non-essential spending. This fuels concerns about longer-term recovery prospects.

“Additionally, export orders continued to contract appreciably amid international travel restrictions at home and abroad during July. Backlogs of work declined at a reduced rate in July. However, confidence in future activity improved to a five-month high.

“Disappointingly, services employment contracted at a still considerable and deeper rate in July. This may prompt the Chancellor to think about further steps to support the labour market in the Autumn Budget, following the measures recently announced in the Summer Statement.

“Prices charged by services companies were essentially flat in July after being cut over the previous four months. However, with input prices rising at a faster rate, services companies’ margins were squeezed.”

Composite services and manufacturing output index points to UK economy changing up a gear in July

Howard Archer adds: “The composite output index for manufacturing and services rose markedly to a 61-month high of 57.0 in July (revised down marginally from the “flash” estimate of 57.1) 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 57.0 took the index substantially above the 50.0 level that indicates flat activity.

“The purchasing managers’ surveys point to the economy changing up a gear at the start of the third quarter as there was a further easing of lockdown restrictions. The EY ITEM Club expects the economy to return to clear growth in the third quarter with expansion around 12% quarter-on-quarter. It is likely that the economy contracted around 20% quarter-on-quarter in the second quarter given that it could only eke out growth of 1.8% month-on-month in May after declining 20.3% in April.”