- The manufacturing sector showed further strengthening with the PMI improving to a 37-month high of 57.5 in December from 55.6 in November. Manufacturing activity was lifted again by stockpiling as producers sought to acquire critical inputs before the UK-EU transition arrangement ended on 31 December. This boost to manufacturing activity now looks set to reverse
- Port delays were reported to have affected manufacturers’ supply chains, also lifting the headline index
- Expansion occurred across all sectors in December, with the consumer sector returning to growth after two months of contraction
- The manufacturing sector will be relieved that the UK and the EU reached a Free Trade Agreement. However, there will be questions as to how much activity and supply chains will be affected by increased regulation and paperwork
- The performance of the manufacturing sector in November and December 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
- The EY ITEM Club suspects that the UK economy contracted by close to 2% quarter-on-quarter in Q4. This would result in an overall GDP contraction of 10.5% in 2020
- With restrictions in place in most areas of the UK, the EY ITEM Club expects the economy will have a challenging start to 2021 and will likely see a second successive quarter of GDP contraction in Q1. 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 vaccine. However, the current GDP growth forecast of 6.2% for 2021 now looks too optimistic given the expected difficult Q1 2021 – 5.5% growth may well be the limit
Howard Archer, chief economic advisor to the EY ITEM Club, says:
“The purchasing managers survey pointed to further strengthening in manufacturing activity in December due to stockpiling ahead of the UK-EU transition period ending on 31 December. The headline index was also lifted by a lengthening of suppliers’ delivery times and delays at UK ports.
“The manufacturing sector has clearly been less affected that many other areas of the UK economy by restrictions on activity. The Government stressed that it wanted manufacturers to stay open during the lockdown and during the restrictions on activity thereafter, and lessons have been learned in keeping activity going from the previous lockdown. Many factories have been adjusted to meet the social distancing requirements so employees can still work there.
“The PMI rose to a 37-month high of 57.5 in December (revised up from the ‘flash’ reading of 57.3) from 55.6 in November and 53.7 in October; it had previously fallen back to 53.7 in October from 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 in December but was still at a healthy level with the index at 55.9 (56.7 in November).
“Markit indicated that “growth was registered across the consumer, intermediate and investment goods sectors. The steepest expansion was at intermediate goods producers, while consumer goods output returned to growth following back-to-back contractions.”
“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 ending of the withdrawal agreement on 31 December.
“Markit said “substantial disruption to supply chains was experienced by manufacturers in December. Vendor performance deteriorated to the third-greatest extent in the survey history, 'beaten' only by the increases in lead times seen during the first wave of the pandemic. Raw material shortages, port delays, freight capacity issues (air, sea and land) and Brexit concerns all contributed to supply-chain disruption.”
“Confidence moved to a six-month low in December from the six-year high seen in November. Nevertheless, sentiment was still relatively decent.
“Jobs were cut for a 10th month running but at the slowest rate since February. Meanwhile, manufacturing input prices rose the most since June 2018, reflecting input shortages, vendor price rises, increased transportation costs, Brexit uncertainty and exchange rate factors. Manufacturing output prices rose the most since February 2019.”
Outlook for UK economy
Howard Archer adds: “The performance of the manufacturing sector in November and December 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 GDP contraction is now forecast to be closer to 2% q/q. This would result in overall GDP contraction of 10.5% in 2020.
“With restrictions now in place in most areas of the UK, the EY ITEM Club expects the economy will have a challenging start to 2021 and will likely see modest contraction in the first quarter. This would result in a double dip recession.
“However, the EY ITEM Club expects the economy to benefit progressively through 2021 from the roll-out of the COVID-19 vaccine. Many consumers are well placed to spend given the recent high savings ratios. That said, the EY ITEM Club’s current GDP growth forecast of 6.2% for 2021 now looks too optimistic given the expected difficult first quarter – 5.5% growth may be the limit.”