- Evidence that the UK economy was already finding life more challenging at the start of Q4, as purchasing managers report manufacturing activity slowed for a second successive month to a three-month low. The manufacturing PMI dipped to 53.7 in October (revised up from the ‘flash’ reading of 53.3) from 54.1 in September and a 30-month high of 55.2 in August
- With the economy facing a month-long national lockdown in England, renewed contraction over Q4 now seems inevitable. The EY ITEM Club suspects that GDP could contract by at least 5% quarter-on-quarter in Q4, and possibly by more
- The manufacturing sector has been less affected than the services sector by increased restrictions on activity, but it was still losing momentum even before the new national lockdown was announced in England
- Most elements of the survey were softer in October with output growth at a four-month low while still being at an elevated level. The growth of new orders slowed due to an easing back in domestic demand, as export orders rose to a 32-month high. Employment in the manufacturing sector fell at an increased rate
- Output and new orders continued to grow in the investment and intermediate goods sectors in October but contracted in the consumer sector. This contrasted with the consumer sector leading the UK economy’s bounce back in Q3 and supports the view that new restrictions and increasing caution will hold back consumer spending in the near term
- There were some signs of stock building in the manufacturing sector ahead of the Brexit transition arrangement ending on 31 December. There was also evidence of manufacturing export orders being lifted by clients in Europe that were looking to secure supplies before possible disruptions resulting from the ending of the withdrawal agreement
- It had already looked highly probable that the Bank of England would provide more support for the UK economy on Thursday – the EY ITEM Club believes that the introduction of the new restrictions makes action look ever more inevitable
- The EY ITEM Club expects the Bank of England to announce a further £100 billion of asset purchases on Thursday, taking the total up to £845bn. However, the Bank of England is highly unlikely to cut interest rates from the current level of 0.10% as it is still carrying out its review on the case for, and practicalities of, introducing negative interest rates
Howard Archer, chief economic advisor to the EY ITEM Club, says:
“The purchasing managers’ survey pointed to manufacturing expansion losing momentum for a second successive month in October, reaching a three-month low.
“The PMI dipped to 53.7 in October (revised up from the ‘flash’ reading of 53.3) from 54.1 in September and a 30-month high of 55.2 in August. The manufacturing PMI had previously risen to August’s peak from 53.3 in July, 50.1 in June, 40.7 in May and a record low of 32.6 in April when the sector had been affected by the lockdown imposed on 23 March.
“October’s reading of 53.7 was still clearly above the 50.0 level which indicates unchanged activity. Indeed, this marked a fifth successive month of clear expansion.”
Outlook for economy following the announcement of new national lockdown in England
Howard Archer adds: “There seems little doubt that a renewed national lockdown will cause the economy to contract again in the fourth quarter – and, very possibly, by an appreciable amount. The EY ITEM Club’s initial forecast is that there could be a GDP contraction of between 5-8% in the fourth quarter.
“Even before a new national lockdown in England – as well as varying measures announced so far in Scotland, Wales and Northern Ireland – the fourth quarter was looking much more challenging for the UK economy, and it was likely there would be a marked rise in unemployment as the furlough scheme drew to a close in October, even allowing for the Government’s latest, more generous job support measures. On top of that, business caution has been added to by uncertainties over whether the UK and EU will reach a trade agreement by 31 December.
“There were already signs of the economy losing momentum with local restrictions being imposed. Consumer confidence fell in October, according to GfK, the CBI distributive trades survey indicated a softening in retail sales, the Lloyds business barometer showed weakening business confidence, and the flash October purchasing managers surveys showed slowing manufacturing and, especially, services activity. Furthermore, the services PMI showed falling new business.
“The EY ITEM Club doubts that any upcoming GDP contraction will be as much as April (which experienced the full effect of the restrictions imposed on 23 March) and over the second quarter (when the economy contracted 19.8% quarter-on-quarter). Hopefully, experience has been gained in keeping activity going. People and companies have got used to home working, while some workplaces and offices have been adjusted to meet COVID-19 health and safety requirements. This includes construction sites and manufacturing plants, which the Government has stressed it wants to keep operating through the new lockdown.
“The new lockdown measures are less severe than those introduced on 23 March, and schools being kept open will make it easier for people with children to keep working. With schools, colleges and universities all staying open, there will not be the large decrease in education output that weighed on GDP in the second quarter. Education output contracted 27.6% quarter-on-quarter in the second quarter after a decline of 8.4% in the first quarter.
“Nevertheless, the impact on the economy is likely to be significant and some sectors will be substantially affected – most obviously hospitality.
“While the EY ITEM Club’s initial estimate is that GDP is likely to contract by at least 5% quarter-on-quarter in the fourth quarter, and possibly by more, much will depend on what happens after 2 December and whether the lockdown continues and what the following tiered local restrictions will be.”
Output grew at slower pace in October; new business expanded at reduced rate despite foreign demand rising to a 32-month high
Howard Archer continues: “According to the latest PMI, output growth slowed to a four-month low in October, although it was still at a decent level.
“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 that “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.””
Howard Archer adds: “The survey revealed that output and new orders continued to grow in the investment and intermediate goods sectors in October but contracted in the consumer sector. This contrasted with the consumer sector leading the UK economy’s bounce back in the third quarter and supports the view that lockdown restrictions and increasing caution will hold back consumer spending.
“Markit indicated that there are some signs of stock building ahead of the Brexit transition arrangement ending on 31 December.
“Confidence was positive, although there were concerns about rising COVID-19 cases and uncertainty over the future UK-EU trading relationship. Additionally, jobs were cut at a faster rate.
“Input prices rose at the fastest rate for 22 months; this was attributed to higher raw material costs, input shortages and suppliers raising prices. Output prices rose at the fastest rate since March, but manufacturers’ margins were squeezed.”