- The ‘flash’ December purchasing managers surveys suggest the economy has returned to modest growth in December after a limited contraction in November. Activity in the services sector continued to be affected by COVID-19 restrictions, but the manufacturing sector showed resilience
- The survey suggests services activity stabilised in December after contracting for the first time in five months in November. The services PMI rose to 49.9 in December from November’s five-month low of 47.6
- The manufacturing sector’s PMI improved to a 37-month high of 57.3 in December from 55.6 in November. Manufacturing activity was again lifted by stockpiling as producers sought to acquire critical inputs before the end of the UK-EU transition arrangement on 31 December. However, port delays were reported to have affected supply chains
- The composite output index for manufacturing and services improved to 50.7 in December after dipping to a five-month low of 49.0 in November
- Joint new orders stabilised after falling over the previous two months due to manufacturing demand. Confidence remained at an elevated level. Joint employment declined at the slowest rate in 10 months in December, likely helped by the extension of the furlough scheme
- The ‘flash’ surveys support the EY ITEM Club’s belief that the economy has shown overall resilience in the fourth quarter given the impact of the English lockdown. However, the bounce back in December is likely to be limited by continuing restrictions on activity
- The EY ITEM Club forecasts Q4 GDP contraction to be around 2% quarter-on-quarter. This would mean an overall GDP contraction of 11.2% over 2020
- The EY ITEM Club’s latest forecast sees GDP growth of 6.2% in 2021 as the economy increasingly benefits from COVID-19 vaccine developments. The forecast assumes the UK and EU agree a Free Trade Arrangement before 31 December
- The EY ITEM Club forecasts GDP growth of 4.3% in 2022, but the economy is not expected to regain its Q4 2019 level until the second half of 2023
- If the UK and the EU do not agree a free trade agreement by 31 December, the EY ITEM Club expects growth in 2021 will be significantly affected – in this scenario, GDP growth of 5.0% is forecast in 2021 and 3.5% growth is forecast in 2022.
Howard Archer, chief economic advisor to the EY ITEM Club, comments:
“The ‘flash’ purchasing managers’ surveys for the UK manufacturing and services sectors indicate that activity returned to modest growth in December after a limited contraction in November.
“The survey points to services activity effectively stabilising in December after contracting for the first time in five months in November, but the rebound was limited by the restraints on the hospitality and leisure sector, as well as social distancing measures required for consumer-facing services. The services PMI improved to 49.9 in December from a five-month low of 47.6 in November and is still marginally below the 50.0 level that indicates flat activity.
“The manufacturing sector showed further strength with the PMI improving to a 37-month high of 57.3 in December from 55.2 in November. Manufacturing activity was again lifted by stockpiling as producers sought to acquire critical inputs before the UK-EU transition period ends on 31 December. Foreign orders were seemingly lifted by purchases by EU companies ahead of the ending of the withdrawal agreement. However, port delays were reported to have affected manufacturers’ supply chains.
“The composite output index for manufacturing and services improved to 50.7 in December after dipping to a five-month low of 49.0 in November from 52.1 in October. It is notable that the weakening in the composite index in November had been substantially less than had occurred in both March and April after the 23 March lockdown. Then, the composite output index reached a record low of 13.8 in April from 36.0 in March and 53.0 in February.
“Other elements of the survey were modestly improved in December. Joint new orders stabilised after contracting over the previous two months. Markit indicated that new manufacturing orders expanded at the fastest rate since August, but new services orders declined for a third month. Survey respondents often cited restrictions on consumer-facing businesses.
“Confidence remained at an elevated level in December, although it eased back from November when it had been the highest since March 2015. Confidence was buoyed by positive news on the vaccine and hopes of a move towards more ‘normal’ trading.
“Some positive news saw joint employment fall at the slowest rate in 10 months in December, likely helped by the extension of the furlough scheme to March.”
December services PMI points to effective stabilisation in December
Howard Archer adds: “The services PMI improvement to 49.9 in December followed PMIs of 47.6 in November, 51.4 in October, 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. New business in the services sector contracted for a third month running in December, albeit relatively modestly. Employment fell at the slowest rate since March.”
Manufacturing PMI at 37-month high in December
Howard Archer comments: “The Government stressed that it wanted manufacturers to stay open during the lockdown and the ongoing restrictions, and experience has been gained in keeping activity going from the first lockdown. Many factories have been adjusted to meet the social distancing requirements, meaning activity can continue.
“The ‘flash’ PMI of 57.3 in December followed levels of 55.6 in November, 53.7 in October, 54.1 in September and a 30-month high of 55.3 in August. It had earlier reached a record low of 32.6 in April during the first lockdown.
“Output growth slowed modestly to a six-month low in December but was still at a healthy level with the index at 55.3, down slightly from 56.7 in November.
“New business growth picked up to a four-month high, helped by firmer domestic demand. Export orders continued to be lifted by purchases by EU companies ahead of the Brexit transition period deadline.
“Markit reported “severe pressure on manufacturing supply chains, which was overwhelmingly linked to freight delays following congestion at UK ports. Around 45% of the survey panel reported longer wait times from suppliers, while only 2% saw an improvement. The lengthening of lead times in December was the third-steepest since the survey began in 1992, exceeded only during COVID-19 shutdowns in April and May. Shortages of critical inputs, alongside pressure on capacity following forward-purchasing by clients ahead of Brexit, contributed to the sharpest rise.”
“Jobs were cut at a reduced rate, while manufacturing input prices rose the most since June 2018 as shipping and commodity prices increased.”