Press release

3 Dec 2020 London, GB

Purchasing managers report renewed but limited contraction in services activity in November – EY ITEM Club comments

The November purchasing managers’ survey points to services activity contracting for the first time since June as the hospitality and leisure sectors in particular were affected by the English lockdown.

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Related topics Growth COVID-19
  • The November purchasing managers’ survey points to services activity contracting for the first time since June as the hospitality and leisure sectors in particular were affected by the English lockdown. The services PMI declined to a five-month low of 47.6 in November (revised up from the “flash” reading of 45.8) from 51.4 in October; this took it below the 50.0 level indicating flat activity.
  • However, November’s contraction in services activity was relatively mild and less than had been indicated by the “flash” reading.
  • Other elements of the services survey were largely softer. New business growth contracted modestly for a second successive month. Employment in the sector fell at the fastest rate for three months. Prices charged by services companies were cut modestly in November, suggesting a need to price competitively to gain business. However, confidence rose to a nine-month high, lifted by positive vaccine news.
  • While limited, the contraction in the services PMI in November still contrasts with the manufacturing PMI, which has reached a 35-month high.
  • The composite output index for manufacturing and services dipped to a five-month low of 49.0 in November (revised up from the “flash” reading of 47.4) from 52.1 in October.
  • November’s relatively resilient purchasing managers surveys reinforce belief that the impact of the national lockdown in England and other restrictive measures on economic activity in Q4 2020 will be much less than occurred in April and overall in Q2 2020 following the March restrictions.
  • There is also evidence of support to economic activity in the manufacturing sector coming from stockbuilding ahead of the UK-EU transition arrangement on 31 December, while the Chancellor’s extension of the furlough scheme to the end of March 2020 should limit the near-term rise in unemployment and help activity.
  • The EY ITEM Club has been expecting GDP contraction of no more than 4% in Q4; but there now looks to be a possibility that the decline in GDP could be less than this. Nevertheless, the EY ITEM Club suspects that the pick-up in economic activity after the end of the English lockdown will be limited. The EY ITEM Club expects overall GDP contraction around 11.5% in 2020.
  • The EY ITEM Club’s latest forecast sees GDP growth of 6.2% in 2021 as the economy benefits from the positive COVID-19 vaccine developments. It is assumed the UK and EU agree a Free Trade Arrangement before the end of the year.
  • GDP growth is then seen at 4.3% in 2022 but the economy is not seen regaining its Q4 2019 level until the latter months of 2023.

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

“The services PMI weakened to a five-month low of 47.6 in November (revised up markedly from the “flash” reading of 45.8) from 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). Nevertheless, the services sector PMI was substantially above April’s record low of 13.4.

“Markit observed: “in April, nearly 80% of all service providers reported a monthly drop in business activity, while the equivalent figure was only 30% in November.”

“New business in the services sector contracted for a second successive month but relatively modestly. The weakness primarily reflected temporary closures among hospitality, travel and leisure businesses. There was a fall in new business from abroad due to restrictions on international travel and tourism.

“There was a marked fall in employment which declined at the fastest rate since August, despite the Chancellor extending the furlough scheme until the end of March.

“Confidence in the services sector rose to the highest since February, lifted by positive vaccine news.

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

Composite services and manufacturing output index points to UK economy contracting in November, but at a much-reduced rate compared to April

Howard Archer adds: “The composite output index for manufacturing and services reached a five-month low of 49.0 in November (revised up from the “flash” reading of 47.4) from 52.1 in October. While this took the composite output index into contractionary territory, the monthly decline was notably 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.

“This reinforces belief that the impact of the national lockdown in England and other restrictive measures on economic activity in November and over Q4 2020 will be markedly less than occurred in April and overall in Q2 2020 following the March restrictions.  

“The lockdown measures in November were less severe than those introduced on 23 March, and schools being kept open made it easier for people with children to keep working. With schools, colleges and universities all staying open, there will not have been 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.

“Additionally, 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.

“There is also evidence of an appreciable lift to manufacturing activity coming from stockbuilding ahead of the UK-EU transition arrangement on 31 December while the Chancellor’s extension of the furlough scheme to the end of March should limit the near-term rise in unemployment and help activity

“Consequently, the EY ITEM Club has been expecting GDP contraction of no more than 4% in Q4; but there now looks to be a very real possibility that the decline in GDP could be less than this. Nevertheless, the EY ITEM Club suspects the pick-up in economic activity following the ending of the English lockdown on 2 December will be limited as restrictions on activity remain appreciable overall. The EY ITEM Club expects overall GDP contraction around 11.5% in 2020.”

Outlook for UK economy in 2021

Howard Archer adds: “The EY ITEM Club’s latest forecast sees GDP growth of 6.2% in 2021 as the economy benefits from the positive COVID-19 vaccine developments. The forecast assumes that the UK and EU will avoid a no-deal outcome at the end of 2020. Even so, there is expected to be some limiting impact on trade and growth in 2021 from the new relationship with the EU, as the UK will no longer have access to the Single Market and Customs Union.

“The EY ITEM Club assumes that a little growth has been pulled into 2021 from 2020 by the national lockdown in England and other major restrictions on activity introduced during Q4 2020. The EY ITEM Club also assumes that the Chancellor’s extension of the jobs furlough scheme until the end of March 2021 will have some limiting impact on the rise in unemployment, which will be supportive to economic activity.

“GDP growth is seen at 4.3% in 2022 as the economy continues to recover ground lost during the 2020 contraction. Nevertheless, the economy is not seen as returning to its Q4 2019 size until the latter months of 2023.”