Press release

22 Jan 2021 London, GB

Flash January purchasing managers survey points to UK heading for clear contraction Q1 – EY ITEM Club comments

The flash January purchasing managers survey points to the economy contracting in Q1 with lockdowns back in place.

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Related topics Growth COVID-19
  • The flash January purchasing managers survey points to the economy contracting in Q1 with lockdowns back in place. The survey indicates that the decline in activity was greater than in November when the there was a one-month lockdown across England alongside restrictions elsewhere.
  • The composite output index for manufacturing and services fell back to an eight-month low of 40.8 in January from 50.4 in December, thereby moving well below the 50.0 level that indicates flat activity.
  • Unsurprisingly, the services PMI weakened to an eight-month low of 38.8 in January from 49.4 in December, contracting at the fastest rate for eight months as much of the hospitality and leisure sectors were closed and social distancing measures affected demand.
  • The manufacturing sector continued to grow in January but at a reduced rate, dipping to a seven-month low of 52.7 in January from a 37-month high of 57.5 in December. Manufacturers were also reportedly affected by weaker export orders and short-term supply chain difficulties. The sector had received a lift in late-2020 from stockpiling and demand from the EU ahead of the end of the Brexit transition period.
  • Other elements of the survey were weaker in January: joint new orders contracted at the fastest rate since May, largely reflecting reduced consumer spending and the closure of consumer-facing businesses. Employment rose at increased rate after the decline had recently slowed.
  • One positive development saw confidence improve modestly to the highest level since May 2014, reflecting hopes that the roll-out of vaccines would boost economic activity over the longer-term.
  • The latest survey reinforces the view that the UK is going to be more affected by lockdown and other restrictions in Q1 2021 than it was in Q4 2020, but still not nearly as much as it was in Q2 2020.
  • The EY ITEM Club expects the economy will experience a clear contraction in the first quarter – possibly in the region of 3-4% quarter-on-quarter (q/q). The EY ITEM Club estimates that the economy was essentially flat in Q4 2020 following a surprisingly limited small GDP contraction of 2.6% month-on-month in November.
  • After Q1, the EY ITEM Club expects the economy to benefit progressively through 2021 from the roll-out of COVID-19 vaccines. Consumers look well-placed to play a key role given the recent high savings ratios, although much will depend on unemployment numbers. After an extended period of weakness, business investment is expected to gain momentum over the course of the year as companies grow more confident in the economy.
  • However, the EY ITEM Club’s December forecast of 6.2% GDP growth for 2021 is now clearly too optimistic: 5.0% growth may well now be the limit for 2021.

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

“The ‘flash’ purchasing managers’ survey for the UK manufacturing and services sectors indicated that overall activity contracted anew in January and at the fastest rate for eight months as reintroduced lockdowns affected the economy, particularly in the services sector.

“The composite output index for manufacturing and services fell back to 40.8 in January after improving modestly to 50.4 in December from a five-month low of 49.0 in November. This took the composite output index well below the 50.0 level that indicates flat activity. This shows that the impact on activity from lockdown was markedly greater in January than in November. However, it continued to be substantially less than in the second quarter of 2020 when the composite index fell as low as 13.8 in April after the original March lockdown.

“The survey points to services activity contracting at the fastest rate for eight months and for a third month running. The services PMI dipped to 38.8 in January from 49.4 in December.

“The manufacturing sector managed to keep on growing in January, but at the slowest rate for seven months. The manufacturing PMI declined to 52.9 from a 37-month high of 57.5 in December.

“Other elements of the survey largely weakened in January which is not a positive sign for activity in the near term. Joint new orders contracted at the fastest rate for eight months, primarily due to reduced consumer spending and the closure of consumer-facing businesses. Employment rose at increased rate after the decline had recently slowed.

“A positive development saw confidence improve modestly to the highest level since May 2014. This reflects hopes that the rolling out of the COVID-19 vaccines could boost economic activity over the longer-term.”

January services PMI points to biggest contraction for eight months

Howard Archer continues: “The services sector was particularly affected by restrictions on hospitality, leisure and travel businesses. There were also reports that some businesses had delayed new projects.

 “New business in the services sector contracted for a fourth month running in January, and at an increased rate.”

Manufacturing PMI points to much reduced expansion

Howard Archer comments: “The survey pointed to the manufacturing sector continuing to expand in January but at a clearly reduced rate.

“In addition to the lockdown, manufacturers were reportedly affected in January by weaker export orders and short-term supply chain issues. The sector had received a lift in late-2020 from stockpiling and demand from the EU as producers sought to acquire critical inputs before the UK-EU transition arrangement ended on 31 December.

“The recent resilience of the manufacturing sector reflects the fact that lessons have been learned across 2020 in terms of keeping activity going during lockdowns. Many factories have been adjusted to meet the social distancing requirements so employees can still work on site.

“Output growth was slight and at an eight-month low in January with the index down to 50.3 (55.9 in December).

“New business contracted for the first time since June, which was a consequence of softening domestic and foreign demand (at a seven-month low). Meanwhile, jobs were cut at an increased rate.”

Ends

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