👀 Copy Legendary Investors' Portfolios in One ClickCopy For Free

UK PMI Adds To Signs Of Fourth Quarter Economic Resilience Amid Second Lockdown

Published 06/12/2020, 07:30
Updated 05/03/2021, 15:50
JPM
-
  • UK all-sector PMI at 49.5 in November, signalling modest downturn
  • Service sector downturn offset by faster growth in manufacturing and construction
  • Business optimism lifted by vaccine news, but temporary Brexit boost likely to fade next year
  • UK PMI data showed encouraging resilience amid renewed COVID-19 lockdown measures in November, suggesting the economy is set for a far smaller hit to GDP in the fourth quarter than seen earlier in the year. The lighter nature of the lockdown, supportive external demand, improved confidence and a temporary Brexit boost have all helped alleviate the economic pain of the lockdown.

    Economy sees divergent trends

    The IHS Markit/CIPS PMI surveys showed service sector activity falling back into decline in November as a second lockdown to fight a resurgent wave of COVID-19 infections hit many businesses, especially consumer-facing firms in areas such as hospitality.

    More encouragingly, manufacturing and construction output continued to rise, and growth even accelerated slightly in both cases compared to that seen in October.

    Moreover, the decline seen in the service sector was far less severe than suffered earlier in the year, at the height of the lockdowns amid the first virus wave.

    The overall situation was therefore one in which the upturns in manufacturing and construction almost entirely offset the downturn recorded in the services sector, resulting in only a modest overall drop in output. The all-sector IHS Markit/CIPS PMI output index, which is a GDP weighted composite of the indices from the three sectors, merely fell from 52.2 in October to 49.5 in November.

    With any reading below 50 indicating contraction, the PMI still points to the UK economy having fallen into decline in November, but the impact of the lockdowns appears to have been far less severe than earlier in the year. Note that this index fell to 36.3 in March and slumped as low as 13.4 in April.

    UK PMI Output

    UK PMI And GDP Compared

    Some caution is warranted in interpreting what the PMI signals for GDP during lockdowns, not least because the PMI coverage excludes retail. GDP fell far more sharply than indicated by the PMI in the second quarter, and also rebounded more markedly than the PMI signalled in the third quarter. The PMI may therefore potentially once again understate the fall in GDP seen during the November lockdown to some degree. However, the relative resilience of the all-sector PMI in November provides a strong signal that GDP will decline by much less than earlier in the year.

    There are various factors which have helped alleviate the impact of the pandemic on the UK economy in the fourth quarter.

    Lighter lockdown

    First, the lockdown measures in the UK have been less severe than earlier in the year. IHS Markit's COVID-19 Containment Index rose from 41 in October to 67 in November, indicating a severe tightening of restrictions, but this compares with readings of 86 and 83 in April and May respectively during the first lockdown.

    UK Flash PMI And Covid-19 Containment

    *COVID-19 containment index is based on information relating to issues such as closures of schools, non-essential shops and restaurants, as well as restrictions on public gatherings, internal mobility and external borders. We also forecast how these are expected to change in coming months, based primarily on government announcements. A reading of 100 means severe restrictions while a reading of zero indicate no restrictions.

    Supportive external demand

    Second, the UK's external environment has been stronger than earlier in the year. Economies such as the US and China have seen sustained strong - and even accelerating - growth in November.

    UK And Global Economic Growth

    The JPMorgan (NYSE:JPM) Global PMI, compiled by IHS Markit, consequently remained in robust expansion territory in November, suggesting that the external demand environment remained supportive to UK businesses. In contrast, synchronised lockdowns around the world earlier the year meant the external environment acted as a major drag, exacerbating weakened domestic demand.

    Improved optimism

    Third, business conditions were supported in December by improved sentiment about the year ahead. Earlier in the year, at the start of the pandemic, the lack of a light at the end of the tunnel meant companies focused on belt tightening amid widespread risk aversion. Business confidence about prospects for the year ahead slumped in March to the lowest in the PMI survey's history. In November, in contrast, encouraging news on vaccine developments in particular helped propel sentiment to its highest since March 2015, signalling a shift to greater risk appetite.

    Future Expectations

    Brexit boost

    A fourth factor is likely to be more temporary. With the UK's departure from the EU at the end of the transition period on 31st December, companies reported a surge in demand from foreign customers - especially in the EU - ahead of Brexit.

    The reported net boost to manufacturing orders and exports (as measured by the reasons cited by companies for rising demand) exceeded that seen ahead of prior Brexit 'deadlines' by a substantial margin. This positive boost to orders will fade, and in fact likely reverse, in the New Year, based on what we have seen during previous bouts of such pre-Brexit ordering.

    Pre-Brexit Boost

    Analysis of reasons cited for either optimism or pessimism in the coming year clearly shows that 'Brexit' is widely cited as the key threat to businesses, especially in the manufacturing sector. Hopes of a successful vaccine form the principal basis for optimism.

    Sectors - Optimism/Pessimism

    "Disclaimer: The intellectual property rights to these data provided herein are owned by or licensed to Markit Economics Limited. Any unauthorised use, including but not limited to copying, distributing, transmitting or otherwise of any data appearing is not permitted without Markit’s prior consent. Markit shall not have any liability, duty or obligation for or relating to the content or information (“data”) contained herein, any errors, inaccuracies, omissions or delays in the data, or for any actions taken in reliance thereon.

    In no event shall Markit be liable for any special, incidental, or consequential damages, arising out of the use of the data. Purchasing Managers' Index™ and PMI™ are either registered trademarks of Markit Economics Limited or licensed to Markit Economics Limited. Markit is a registered trade mark of Markit Group Limited."

    Original Post

Latest comments

Loading next article…
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.