Press release

3 Mar 2021 London, GB

Purchasing managers report services activity near to stabilisation in February after January’s contraction – EY ITEM Club comments

The purchasing managers survey indicates that the services sector was close to stabilising in February after contracting considerably in January. The services PMI improved to a four-month high of 49.5 in February from an eight-month low of 39.5 in January.

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Related topics Growth COVID-19
  • The purchasing managers survey indicates that the services sector was close to stabilising in February after contracting considerably in January. The services PMI improved to a four-month high of 49.5 in February from an eight-month low of 39.5 in January
  • The hospitality, leisure and travel sectors saw reduced but continued declines in activity as they remained largely closed, but there was expansion in business services and technology. New business fell at a much-reduced rate and only slightly. Employment fell at the slowest rate since last March
  • Optimism for the outlook over the next 12 months rose to the highest since December 2006, reflecting hopes that the COVID-19 vaccines roll-out would lead to a strong economic rebound
  • Input prices for service companies rose at the fastest rate for a year, squeezing margins even though output prices also were at a one-year high
  • With manufacturing expanding in February, the composite output index for manufacturing and services rose to 49.6, after falling to an eight-month low of 41.2 in January from 50.4 in December. It is now only marginally below the 50.0 level that indicates flat activity
  • The February purchasing managers’ surveys ease some concern about the potential size of contraction in the UK economy in Q1. Nevertheless, it still appears that the UK is being much more affected by restrictions in Q1 2021 than it was in Q4 2020. The EY ITEM Club expects the economy will experience a clear contraction in the first quarter – possibly around 4% quarter-on-quarter
  • After Q1, the EY ITEM Club expects the economy to benefit progressively through 2021 as the roll-out of COVID-19 vaccines facilitates the easing of restrictions and boosts consumer and business confidence. 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. This means the economy regains its peak level of Q4 2019 in Q3 2022.

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

“Services activity was near to stabilisation in February after contracting at the fastest rate since last May 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 rose to a four-month high of 49.5 in February – revised down slightly from the ‘flash’ reading of 49.7 – after falling back to an eight-month low of 39.5 in January from 49.4 in December. It had previously fallen to 47.6 in November when the second English lockdown was in place.

“Markit noted that restrictions on travel, leisure and hospitality continued to affect activity, but there were some pockets of growth in technology and business services.

“New business in the services sector contracted for a fifth month running in February, but at a much-reduced rate compared to January and only marginally. Subdued demand was mainly attributed to a lack of sales opportunities and hesitancy among clients due to the pandemic. Demand from abroad continued to fall appreciably, significantly due to international travel restrictions. Regulatory and supply chain problems related to Brexit were also cited. 

“Employment fell at the slowest rate since last February. This was helped by the furlough scheme, especially for consumer services companies. There were also reports that increased optimism over the outlook also helped to stabilise employment.

“A positive development saw confidence in the services sector increase for a fourth successive month – to the highest level since December 2006 – as the vaccines improved longer-term hopes for the economy.

“Prices charged by services companies rose at the fastest rate for a year but margins were still squeezed as input prices also rose at the fastest rate for 12 months and by a greater rate.”

Composite February services and manufacturing output index points to near stabilisation after January’s fastest contraction for eight months       

Howard Archer continues: “The composite output index for manufacturing and services improved to 49.6 – revised down slightly from the ‘flash’ reading of 49.8 – in February after reaching an eight-month low of 41.2 in January from 50.4 in December. This took 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 45.4 was still below the 49.0 level seen in November during the previous lockdown. This indicates that the impact to activity during the first two months of 2021 from lockdown has been considerably greater than was seen in November. However, the impact of the latest lockdown continued to be substantially less than was seen in the initial 2020 lockdown when the composite index fell as low as 13.8 in April.

“Furthermore, the marked improvement in February’s composite output index suggests activity has come off its January lows and eases some concern about the potential size of contraction in the UK economy in the first quarter.”