- The ‘flash’ October purchasing managers’ surveys point to the economy losing momentum at the start of Q4. Increased restrictions on activity amid rising COVID-19 cases clearly weighed on activity, particularly in the services sector. The composite output for joint services and manufacturing output fell to a four-month low of 52.9 in October from 56.1 in September and a 72-month high of 59.1 in August.
- The surveys point to services activity in particular losing momentum in October as the hospitality sector was affected by increased restrictions and general consumer spending on services fell. There was also a slowdown in manufacturing activity. The services PMI dipped to a four-month low of 52.3 in October, while the manufacturing PMI eased back to a three-month low of 53.3.
- Other elements of the surveys were also largely softer in October. Joint new orders contracted for the first time in four months, primarily due to falling orders in the services sector, and confidence in future output was the weakest since May. In addition, services and manufacturing jobs fell again in October, providing context for the stronger job support measures announced on Thursday by the Chancellor.
- There were only limited signs of stock building in the manufacturing sector ahead of the Brexit transition deadline on 31 December. There was evidence of manufacturing export orders being lifted by overseas clients looking to secure supplies before possible disruption caused by the end of the transition period.
- The weaker ‘flash’ October purchasing managers’ surveys for services and manufacturing activity add to the EY ITEM Club’s suspicion that Q4 2020 will be challenging for the UK economy due to increased restrictions on activity as COVID-19 cases rise, a likely significant rise in unemployment and waning pent-up demand.
- Additionally, uncertainty over a UK-EU trading deal may magnify business and investment caution in Q4. There may, however, be some boost to growth in Q4 due to significant stock building ahead of the 31 December Brexit transition period deadline.
- The October purchasing managers’ surveys support the EY ITEM Club’s belief that the Bank of England is likely to provide more support to the UK economy on 5 November after the Monetary Policy Committee (MPC) meeting. The EY ITEM Club expects the Bank of England to announce a further £100bn of asset purchases, taking the total up to £845bn. However, the EY ITEM Club believes it would be highly unlikely the Bank cuts interest rates from the current level of 0.10% in this meeting as the review on the case for, and practicalities of, introducing negative interest rates is ongoing.
Howard Archer, chief economic advisor to the EY ITEM Club, comments:
“The October ‘flash’ purchasing managers’ surveys for the UK manufacturing and services sectors indicate that activity lost momentum at the start of the fourth quarter.
“The loss of momentum is particularly marked in the services sector. This was strongly influenced by new restrictions on the hospitality sector, as pubs, bars and restaurants were given a 10pm curfew and were restricted to table service only. There were also reports that general consumer spending on services had been dampened by restrictions.
“The composite output index for manufacturing and services – which has been running for 22 years – dipped to a four-month low of 52.9 in October from 56.5 in September and a 72-month high of 59.1 in August. It reached 57.0 in July, 47.7 in June, 30.0 in May and an all-time low of 13.8 in April.
“October’s reading of 52.9 was above the 50.0 level that indicates flat activity.
“Other elements of the survey were also softer in October. Joint new orders contracted for the first time in four months as services orders declined and manufacturing orders rose at a reduced pace.
“Confidence weakened for a third month running in October to be at the lowest level since May. This was entirely due to weakening sentiment in the services sector; manufacturing optimism was the strongest since September 2014.
“Employment continued to fall in October, although redundancies were more extensive in services than in manufacturing. Overall, this provides context for the stronger job support measures announced on Thursday by the Chancellor.”
October services PMI points to markedly reduced expansion
Howard Archer continues: “Services activity lost appreciable momentum in October. The ‘flash’ services PMI dipped to a four-month low of 53.3 in October from 56.1 in September and a 64-month high of 58.8 in August (when the ‘Eat Out to Help Out’ scheme had lifted activity in the restaurant sector). It had previously improved to the August high from 56.5 in July, 47.1 in June, 29.0 in May and a record low of just 13.4 in April.
“Markit observed that “Survey respondents overwhelmingly suggested that the latest setback for service sector output was due to a renewed downturn across the travel, leisure and hospitality industries amid tighter restrictions on trade and local lockdown measures.””
Howard Archer continues: “New business in the services sector contracted for the first time since June.
”Confidence in the services sector dipped to a four-month low in October.”
Manufacturing PMI shows softer yet resilient expansion in October
Howard Archer comments: “The ‘flash’ purchasing managers’ survey points to decent growth in manufacturing expansion, although the gap between August’s 30-month high widens.
“The PMI eased back to 53.3 in October from 54.1 in September and 55.3 in August. It had previously improved to August’s 30-month high from 53.3 in July, 50.1 in June, 40.7 in May and a record low of 32.6 in April.
“Output growth slowed to a 4-month low in October, although it was still at a decent level with the index at 56.4.
“New business growth also slowed but was again relatively decent. This was helped by export orders rising at the strongest rate since February 2018. Markit reported “Survey respondents noted rising demand from clients in China and the United States, alongside a temporary boost from Brexit stock building among clients in Europe.”
“Markit indicated that there were only limited signs of stock building ahead of the Brexit transition arrangement ending on 31 December, reporting “There were some reports of inventory building in response to Brexit uncertainty, but this was more than offset by those manufacturers reporting a deliberate streamlining of stocks due to working capital pressures.
“Confidence picked up to the highest level since September 2014. Nevertheless, redundancies were made at a faster rate.”