- The latest purchasing managers survey points to the services sector being significantly affected by January’s lockdown, as large parts of the hospitality, leisure and travel sectors were closed
- The services PMI reached an eight-month low of 39.5 in January (revised up from the ‘flash’ reading of 38.8). This followed a reading of 49.4 in December. This was deeper than the decline in the services PMI – to 47.6 – that occurred in during the previous lockdown in November
- It was also reported that clients were more cautious in their spending patterns
- Other elements of the services survey were weak in January, suggesting limited near-term activity. New business fell and a squeeze on margins in December highlighted the pressure on many to price competitively. Employment fell quicker than in previous months
- Positively for the longer-term outlook, optimism for the next 12 months rose to the highest since May 2014, reflecting hopes that the successful rolling out of the COVID-19 vaccines could lead to a strong economic rebound
- With the manufacturing sector expanding at a slower rate in January, the composite output index for manufacturing and services fell to an eight-month low of 41.2 (up from the ‘flash’ reading of 40.8). This was down from 50.4 in December, moving the index below the 50.0 level that indicates flat activity. The composite index had only dipped to 49.0 in November
- The January services purchasing managers’ survey reinforces the view that the UK is being much more affected by lockdowns and restrictions in the first quarter of 2021 than it was in the fourth quarter of 2020. The EY ITEM Club expects the economy will experience a clear contraction in the first quarter – possibly in the region of 4% quarter-on-quarter
- After a challenging first quarter, the EY ITEM Club expects the economy to benefit progressively through 2021 from the roll-out of COVID-19 vaccines. Consumer spending is likely to play a key role given the recent high savings ratios, although much will depend on unemployment numbers. Business investment is expected to gain momentum as companies grow more confident in the economy
- The EY ITEM Club’s recent Winter 2021 forecast sees GDP growth of 5.0% in 2021 after estimated contraction of 10.1% in 2020.
Howard Archer, chief economic advisor to the EY ITEM Club, comments:
“Services activity contracted at the fastest rate for eight months in January, as well as for a third successive month. The sector was particularly affected by the restrictions on the hospitality, leisure and travel sectors. There were also reports that some businesses had delayed new projects.
“The services PMI fell to 39.5 in January – revised up from the earlier ‘flash’ reading of 38.8 – after improving to 49.4 in December from a five-month low of 47.6 in November when the second English lockdown was in place.
“It is notable that January’s decline in the services PMI was substantially greater than had occurred in November.
“According to Markit, around 41% of survey respondents indicated a decline in output during January, while only 15% registered an expansion. Survey respondents also cited cautious spending patterns among clients and renewed delays to projects due to the pandemic. Where growth was reported, this was often linked to resilient demand for residential property stamp duty deadline.
“New business in the services sector contracted at the fastest rate since May and for a fourth month running in January. This was attributed to clients’ reluctance to spend. Export demand was weak amid restrictions on international travel, while Brexit was also cited as a factor. Employment fell at a faster rate.
“Meanwhile, prices charged by services companies edged up in January but margins were still squeezed as input prices rose more.
“On a positive note, optimism for the outlook over the next 12 months rose to its highest level since May 2014, reflecting hopes that the successful rolling out of the COVID-19 vaccines could lead to a strong economic rebound.”
Composite January services and manufacturing output index points to fastest contraction for 8 months
“The composite output index for manufacturing and services fell back to an eight-month low of 41.2 in January – revised up from the ‘flash’ reading of 40.8 – 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, indicating that the lockdown impact was markedly greater in January than in November. However, the composite index is still much higher than it was in the second quarter of 2020 when it fell as low as 13.8 in April following the original March lockdown.”