Press release

4 Nov 2020 London, GB

Purchasing managers report sharp slowdown in services activity in October as renewed restrictions impact – EY ITEM Club comments

The purchasing managers survey points to services activity losing momentum in October as the hospitality sector was impacted by increased restrictions which were also reported to have dampened general consumer spending on services.

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  • The purchasing managers survey points to services activity losing momentum in October as the hospitality sector was impacted by increased restrictions which were also reported to have dampened general consumer spending on services. The services PMI dipped to a 4-month low of 51.4 in October (revised down from the “flash” reading of 52.3) from 56.1 in September and a 64-high of 58.8 in August
  • With the economy facing a month-long national lockdown in England, renewed contraction over the fourth quarter now seems inevitable. The EY ITEM Club suspects that GDP could contract by around 5% quarter-on-quarter in Q4
  • The services sector looks set to suffer substantial contraction in November as it will be particularly hard hit (most notably the hospitality sector) by the national lockdown in England
  • Most elements of the services survey were clearly softer in October. Of particular note, new business growth contracted for the first time since June while confidence weakened to the lowest level since May. Services jobs fell sharply again in October, albeit at a reduced rate. Prices charged by service companies were cut modestly, reflecting a need for many companies to price competitively to gain business
  • The survey shows the services and manufacturing composite output index dipped markedly to a four-month low of 52.1 in October (revised down from the “flash” estimate of 52.9) from 56.5 in September and August’s six-year high of 59.1

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

“Services activity lost momentum in October as it was clearly impacted by increased restrictions on activity. Indeed, the slowdown in services activity in October was deeper than first reported by the “flash” indicator.

“The services PMI fell back markedly to a 4-month low of 51.4 in October (revised down from the “flash” reading of 52.3) from 56.1 in September and a 64-month high of 58.8 in August (when the Eat Out to Help Out scheme 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 in the hospitality, transport and leisure sectors widely commented on an adverse impact from tightening restrictions on trade due to the coronavirus disease 2019 (COVID-19) pandemic.

“This was only partly offset by sustained expansion in areas related to digital services, business-to-business sales and housing market transactions.

“New business in the services sector contracted for the first time since June.

“Confidence in the services sector dipped to a five-month low in October.

“There was another sharp fall in employment in the services sector in October, albeit the slowest since March, which highlighted the case for the Chancellor to introduce  more job support measures.

“Prices charged by services companies were cut modestly in October, suggesting a need to price competitively to gain business. Input prices rose at a solid rate so margins were squeezed.”

Composite services and manufacturing output index points to UK economy losing significant momentum at the start of the fourth quarter

Howard Archer adds: The composite output index for manufacturing and services dipped to a 4-month low of 52.1 in October (revised down from the “flash” reading of 52.9) from 56.5 in September and a 72-month high of 59.1 in August. It had previously improved to August’s high 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).

“October’s reading of 52.1 was above but significantly closer to the 50.0 level that indicates flat activity. It was also substantially below the third quarter average of 57.5.”

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 many 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.”