- Despite being revised down from the “flash” reading, the final August purchasing managers survey points to services activity strengthening to a 64-month high. This builds on July’s substantial improvement when the sector benefitted from the re-opening of large parts of the hospitality sector and other consumer services
- The services PMI rose to 58.8 in August (revised down from the “flash” estimate of 60.1) from 56.5 in July, 47.1 in June, 29.0 in May and a record low of 13.4 in April
- Higher consumer spending meant that new business grew at the fastest rate since December 2016, boding well for services activity in the near term at least. . There was also a reported bounce in business spending. However, export demand continued to contract
- Services jobs fell appreciably in August and at the fastest rate since May. There was also a faster drop in manufacturing jobs in August. This may prompt the Chancellor to consider further steps to support the labour market in the Autumn Budget
- There was also some slippage in confidence in the services sector in AugustThe survey shows joint services and manufacturing output expanding at the fastest rate for six years in August. The composite output index rose to 72-month high of 59.1 in August (revised down from the flash reading of 60.3) from 57.0 in July
- The August services and manufacturing purchasing managers’ surveys bolsters the EY ITEM Club’s belief that the economy will see a substantial rebound in Q3 after GDP contracted a record 20.4% quarter-on-quarter in Q2. The EY ITEM Club expects GDP growth of at least 12% quarter-on-quarter in Q3; growth could reach around 15% as the economy benefits from reduced lockdown restrictions and the release of pent-up demand
- However, EY ITEM Club suspects growth is likely to slow appreciably in tQ4 with unemployment likely to rise markedly following the ending of the furlough scheme and as the boost from pent-up demand wanes
Howard Archer, chief economic advisor to the EY ITEM Club, says:
“Services activity built on July’s substantial improvement in August to expand at the fastest rate since April 2015, according to the purchasing managers.
“The services PMI rose to 58.8 in August (revised down from the “flash” reading of 60.1) from 56.5 in July, 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.
“August’s reading of 58.8 was substantially 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.
“Strongly improved consumer spending was cited as a key factor to improved services activity. There was also a reported bounce in business spending on services.
“New business in the services sector grew at the fastest rate since December 2016. Markit reported this reflected ‘pent up demand across the housing market, rising spending as a result of the UK government's Eat Out to Help Out scheme and a gradual recovery in demand for business services from the low point seen during April.’ However, it was not all good news on the new business front with some companies still reporting falling new business; this reflected ‘restrictions on international travel, ongoing global economic uncertainty due to the pandemic and falling export sales. August data indicated that new work from abroad decreased for the seventh successive month and the speed of the downturn was little-changed since July.
“However, confidence dipped in the services sector in August from July’s five-month high. This reflected some increased worries about the domestic economic outlook as government support measures taper off.
“In August, employment in the services sector fell at the fastest rate since May. Markit said that around one-in-three survey respondents (34%) reported a drop in staffing levels during August, while only 11% reported a rise. This may prompt the Chancellor to consider further steps to support the labour market in the Autumn Budget following the measures announced in July’s Summer Statement.
“Prices charged by services companies were essentially flat for a second month in August, after being cut over the previous four months. Input prices rose at a reduced rate, partly reflecting subdued wage costs. Nevertheless, services companies’ margins were still squeezed.”
Composite services and manufacturing output index points to UK economy strengthening further in August
Howard Archer continues: “The composite output index for manufacturing and services rose for a fourth successive month to be at a 72-month high of 59.1 in August (revised down from the “flash” reading of 60.3), up from 57.0 in July, 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).
“August’s reading of 59.1 took the index substantially above the 50.0 level that indicates flat activity.
“The August services and manufacturing purchasing managers surveys point to the economy picking up markedly further, which bodes well for third-quarter growth after record GDP contraction of 20.4% quarter-on-quarter in the second quarter. The EY ITEM Club expects GDP growth of at least 12% quarter-on-quarter in the third quarter and it looks increasingly likely that it could reach around 15% as the economy benefits from sharply reduced lockdown restrictions and the release of pent-up demand.
“However, some elements of the surveys – particularly relating to falling employment and slippage in confidence – highlight uncertainties about the longer-term growth outlook. The EY ITEM Club suspects growth is likely to slow appreciably in the fourth quarter as unemployment rises markedly following the ending of the furlough scheme and the boost from pent-up demand wanes.”