Lockdown three leads to ‘steep downturn’ for services

3 February 2021

The third UK nationwide lockdown in January led to the fastest reduction in business activity in eight months, according to the latest PMI.

While there was a sharp downturn in demand, business optimism improved for the third consecutive month as firms placed hope in the Covid vaccination rollout. 

The IHS Markit/CIPS UK Services Purchasing Managers’ Index registered 39.5 in January, plummeting from 49.4 in December. Around two-fifths of survey respondents reported a decline in output in January. 

Lockdowns across the UK led to a slump in output among travel, leisure and hospitality businesses, and respondents cited cautious spending patterns among clients and renewed delays to projects due to the pandemic. 

Total volumes of new work across the service economy also decreased at a sharp and accelerated pace, and new business from abroad fell at a steeper pace than domestic sales. 

Survey respondents cited the negative impact of international travel restrictions on export sales, but Brexit was also cited as a factor leading to lower orders from clients in the EU.

Staffing numbers decreased for the 11th month in a row and job shedding intensified, but remained less severe than at the start of the pandemic. Reduced employment was linked to a combination of shrinking demand and pressure to cut overheads. 

However, around 60% of the survey panel anticipated a rise in business activity over the next 12 months. Improved confidence was linked to progress made in the UK’s vaccine rollout.

Duncan Brock, group director at CIPS, said: "The cost of operating in the current economic climate continued to bear down on the services sector as shortages in shipping availability and higher transportation charges saw another inflationary rise in doing business.

"Lockdown measures and rising costs contributed to the steepest fall in overall activity since the historic lows of last year and the sector’s hand was forced into also raising prices to consumers for the first time in five months.

"Regardless of the highest optimism since May 2014, the sector will remain in a parlous state until vaccination programmes give customers the confidence to start spending again and allow room for the government to inject confidence into the economy by reducing covid restrictions."

Tim Moore, economics director at IHS Markit, said: “Service providers experienced a steep downturn in business activity due to the third national lockdown in January, although the speed of decline remains much slower than last spring. Tight restrictions on travel, leisure and hospitality resulted in severely reduced trading among customer-facing businesses.

"While the UK economy is on course to contract sharply during the first quarter of 2021, businesses remain confident that pent-up demand and an easing of pandemic restrictions will provide a springboard to recovery later this year.”

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