- The purchasing managers survey points to services activity close to stabilising in December after contracting for the first time in five months in November. However, the rebound was limited by the restrictions on the hospitality and leisure sector, as well as social distancing measures affecting demand for consumer-facing services
- The services PMI rose to 49.4 in December from a five-month low of 47.6 in November
- Given the current widespread restrictions on activity, near-term prospects for the services sector look to be challenging, especially for the hospitality, leisure and tourism sectors
- A squeeze on services companies’ margins in December highlighted the pressure on many of them to price competitively to gain business
- The performance of the manufacturing and services sector in November and December shows that the overall impact of the national lockdown in England and other restrictive measures on economic activity in Q4 2020 were markedly less than occurred in April and overall in Q2 2020 following the March restrictions
- The EY ITEM Club suspects that the UK economy contracted by close to 2% quarter-on-quarter in Q4 of 2020. This would result in overall GDP contraction of 10.5% in 2020
- With restrictions in place and a lockdown set to last until at least mid-February, the EY ITEM Club expects the economy will have a challenging start to 2021 and will experience clear contraction in Q1 – possibly in the region of 3-4% quarter-on-quarter. This would result in a double dip recession
- The EY ITEM Club expects the economy to benefit progressively through 2021 from the roll-out of the COVID-19 vaccines. However, the current GDP growth forecast of 6.2% for 2021 is now too optimistic given the updated forecast for Q1 – 5.0% growth may well now be the limit.
Howard Archer, chief economic advisor to the EY ITEM Club, says:
“Services activity was close to stabilising in December after a limited contraction in November. The rebound in December was limited by the ongoing restrictions on the hospitality and leisure sector. Markit pointed to “business disruptions, restrictions on trade and temporary closures due to the [COVID-19] pandemic.
“The strongest services sectors in December were residential property, business-to-business services (especially e-commerce), and providers of digital consumer services.
“The services PMI improved to 49.4 in December (revised down from the ‘flash’ reading of 49.9) after weakening to a five-month low of 47.6 in November 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.
“New business in the services sector contracted for a third month running in December, albeit relatively modestly. This was attributed to clients’ reluctance to spend. Export demand was weak amid restrictions on international travel while Brexit uncertainty was also mentioned.
“Employment fell at the slowest rate since March, with the extension of the furlough scheme helping matters. Meanwhile, confidence in the services sector rose to the highest level for almost six years, lifted by positive vaccine news.
“Prices charged by services companies were cut modestly in December, suggesting a need to price competitively to gain business. Input prices rose at the fastest rate for 10 months, so services companies’ margins were squeezed.”
Composite services and manufacturing output index points to UK economy returning to slight growth in December after limited contraction in November
Howard Archer continues: “The purchasing managers’ surveys for the UK manufacturing and services sectors indicated that joint output returned to modest growth December after limited contraction in November as the lockdown in England ended in early December, but restrictions remained tight and were increased as the month progressed.
“The composite output index for manufacturing and services improved to 50.4 in December (revised down from the ‘flash’ reading of 50.7) after dipping to a five-month low of 49.0 in November from 52.1 in October. This took the composite output index modestly back above the 50.0 level that indicates flat activity. 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.”
Outlook for UK economy
Howard Archer adds: “The performance of the services and manufacturing sectors in November and December, according to the purchasing managers, highlights that the overall impact of the national lockdown in England and other restrictive measures on economic activity in Q4 2020 was markedly less than occurred in April and overall in Q2 2020 following the March restrictions.
“Indeed, the EY ITEM Club had believed that GDP contraction in the fourth quarter could be limited to not much more than 1% quarter-on-quarter. However, the increased restrictions announced on 20 December mean that Q4 2020 GDP contraction is now estimated to be closer to 2% quarter-on-quarter. This would result in overall GDP contraction of 10.5% in 2020.
“With lockdown now back in place in England and restrictions elsewhere that are set to last through to mid-February at least, the economy will have a challenging start to 2021 and will undoubtedly experience contraction in the first quarter. The EY ITEM Club suspects that the first quarter decline in GDP could be in the region of 3-4% quarter-on-quarter. This would result in a double dip recession.
“After that, the EY ITEM Club expects the economy to benefit progressively through 2021 from the roll-out of the COVID-19 vaccines. Many consumers are well placed to spend given the recent high savings ratios. However, the current GDP growth forecast of 6.2% for 2021 is now clearly too optimistic given the updated first quarter forecast – 5.0% growth may well now be the limit for 2021.”