- Some welcome UK economic news as the flash February purchasing managers survey indicated that joint services and manufacturing activity was close to stabilising
- The composite output index for manufacturing and services rose to 49.8 in February after falling to an eight-month low of 41.2 in January from 50.4 in December. The index is now only marginally below the 50.0 level that indicates flat activity. The composite index had dipped to 49.0 in November during the previous lockdown
- The services sector is close to stabilising in February after contracting in January. The hospitality, leisure and travel sectors saw reduced but still-significant declines in activity as they remained largely closed, while there was modest expansion in business and financial services. The services PMI improved to a four-month high of 49.7 in February from an eight-month low of 39.5 in January
- The manufacturing PMI rose to 54.9 in February from a three-month low of 54.1 in January. However, the underlying performance of the sector in February was weaker than the headline reading indicates, with output barely rising. Manufacturers were also reportedly affected by ongoing supply chain difficulties
- Joint new orders contracted for a fifth month, largely reflecting reduced export demand. Employment fell again but at the slowest rate since last March. Confidence improved to the highest level since April 2014
- While the improvement in activity eases some concern about the potential size of contraction in the UK economy in Q1, it still appears that the UK is being much more affected by lockdown and restrictions now than it was in Q4 2020. The EY ITEM Club expects the economy will experience a Q1 contraction – possibly around 4% quarter-on-quarter
- 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 how much unemployment ultimately rises. 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
- The EY ITEM Club currently forecasts GDP growth of 5.0% in 2021 followed by expansion of 6.5% in 2022, with the economy regaining its peak level of Q4 2019 in Q3 2022.
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 was close to stabilisation in February after contracting at the fastest rate for eight months in January.
“The composite output index for manufacturing and services improved significantly to 49.8 in February after falling to 41.2 in January from 50.4 in December. February saw the composite output index nearly back up to the 50.0 level that indicates flat activity.
“Nevertheless, the joint January-February average for the composite output index of 45.5 was still clearly below the 49.0 seen in November during the previous lockdown. This indicates that the impact of the latest lockdown on activity during the first two months of 2021 has been appreciably greater than was seen last time around. However, the impact of the latest lockdown has continued to be substantially less than was seen in the second quarter of 2020, when the composite index fell as low as 13.8 in April after the original March lockdown.
“Joint new orders contracted for a fifth successive month in February, with export orders particularly weak. Employment fell again, but at the slowest rate since last March.
“A positive development saw confidence improve to the highest level since April 2014, primarily reflecting hopes that the roll-out of COVID-19 vaccines would boost economic activity over the longer-term. However, Markit reported some concerns were expressed about the long-term impact of Brexit.”
February services PMI points to near stabilisation after January’s contraction
Howard Archer continues: “Services activity was near to stabilisation in February after contracting in January at the fastest rate since last May. The hospitality, leisure and travel sectors saw reduced but still significant declines in activity as they remained largely closed, while there was modest expansion in business and financial services.
“The services PMI rose to a four-month high of 49.7 in February after falling back to an eight-month low of 39.5 in January from 49.4 in December. It had previously reached 47.6 in November when the second English lockdown was in place.
“New business in the services sector contracted for a fifth month running in February, but only marginally. Employment also fell slightly. Nevertheless, confidence increased to the highest level since September 2009, again reflecting longer-term hopes for the economy.
Manufacturing PMI points to underlying modest growth
Howard Archer comments: “The manufacturing sector continued to expand in February but at a modest underlying rate. The PMI rose to 54.7 in February from a three-month low of 54.1 in January, compared with the 37-month high of 57.5 in December.
“However, the headline PMI rate overstates the underlying performance of the manufacturing sector as it was lifted by long supplier lead times, reflecting significant ongoing supply chain challenges. According to Markit, this was attributed to international shipping delays, strong worldwide demand for raw materials and Brexit-related trade frictions. Markit said that around 58% of its survey panel reported longer delivery times from suppliers, while only 2% saw an improvement in February.
“Output growth was slight in February with the index at a nine-month low of 50.5 compared to 50.7 in January, while employment rose at a reduced rate.
“New business rose in February after contraction in January, which had been the first decline since June. Meanwhile, export demand contracted in February, with Markit reporting that survey respondents expressed difficulties with fulfilling orders to existing clients in the EU due to higher costs and transportation delays.”