CIPS News


Manufacturing sector leads turnaround in momentum across UK economy in June

CIPS 23 June 2020

However, there were also widespread reports that underlying demand remained very subdued and cutbacks to client spending had acted as continued drag on overall business activity.

IHS Markit / CIPS Flash UK Composite PMI®

- Flash UK Composite Output Index Jun: 47.6, four-month high (May final: 30.0)

- Flash UK Services Business Activity Index Jun: 47.0, four-month high (May final: 29.0)

- Flash UK Manufacturing Output Index Jun: 50.8, four-month high (May final: 35.0)

- Flash UK Manufacturing PMI Jun: 50.1, four-month high (May final: 40.7)

June data indicated a vastly improved overall picture across the UK private sector, with the downturn in total business activity continuing to steady after the record rate of decline seen at the height of the lockdown during April. Another drop in service sector activity contrasted with a return to production growth among manufacturing companies in June.

The headline seasonally adjusted IHS Markit / CIPS Flash UK Composite Output Index – which is based on approximately 85% of usual monthly replies – rose to 47.6 in June, from 30.0 in May. The latest reading was below the 50.0 no-change threshold, but signalled the slowest pace of decline since the start of the downturn in March.

Looking at the month-on-month change in the headline index, the rise since May (+17.6 points) was the largest since the start of the series in January 1998, which highlighted a decisive shift in momentum. At the same time, private sector firms also signalled a rebound in business expectations for the year ahead, with confidence reaching a four-month high in June.

Survey respondents mainly noted that the easing of restrictions related to the coronavirus disease 2019 (COVID-19) pandemic had a favourable impact on economic activity, with business operations gradually resuming in a number of sectors and staff brought back from furlough. However, there were also widespread reports that underlying demand remained very subdued and cutbacks to client spending had acted as continued drag on overall business activity.

June data signalled a reduction in new work received by UK private sector firms for the fourth month running, although the pace of decline eased sharply since May. Concerns about the likely speed Comment of recovery in customer demand also weighed on employment numbers during June, with the latest survey indicating another rapid, albeit slower, drop in total staffing levels.

UK private sector firms indicated a squeeze on margins during June, with subdued demand leading to widespread price discounting despite a rebound in average cost burdens. A number of survey respondents noted that they had absorbed extra operating costs amid efforts to adapt and restart business operations with COVID-19 safety measures.

IHS Markit / CIPS Flash UK Manufacturing PMI®

The seasonally adjusted IHS Markit/CIPS Flash UK Manufacturing Purchasing Managers’ Index® (PMI®) – a composite single-figure indicator of manufacturing performance – posted 50.1 in June, up from 40.7 in May and fractionally above the neutral 50.0 value.

Moreover, the manufacturing output index also moved back into growth territory (50.8), which ended ending a three-month period of decline. Higher volumes of production were linked to a partial reopening of manufacturing plants.

However, total new orders continued to decline in June, with manufacturers often commenting on shortages of new sales to replace completed contracts. Survey respondents cited particularly weak demand across the automotive and aviation sectors in June.

Looking ahead, manufacturers indicated a rise in business optimism to its highest since September 2018. Expectations of higher output in the next 12 months reflected hopes of a sustained recovery in manufacturing operations from the slump in production volumes seen during the initial phase of the COVID-19 pandemic.

IHS Markit / CIPS Flash UK Services PMI®

June data indicated a much slower reduction in service sector activity than that seen in the previous month. This was highlighted by a rise in the seasonally adjusted IHS Markit/CIPS Flash UK Services PMI® Business Activity Index to 47.0, up from 29.0 in May. The latest reading signalled the slowest pace of decline in service sector output since the start of the downturn in March.

Around 33% of the survey panel recorded a fall in business activity during June, while only 28% signalled an expansion. This was an improvement on the situation in May, when more than half of all respondents reported a drop in activity and just 13% experienced a rise.

Financial Intermediation was the best performing area of activity in June, followed by Transport & Communication Services, with survey respondents commenting on a boost to demand following the gradual restart of activity across the UK economy. Meanwhile, overall service sector output was held back by business closures in the Hotels, Restaurants & Catering category and another steep downturn signalled by Business-to-Business service providers.

The latest survey indicated a further sharp drop in staffing numbers across the service economy, despite some companies reporting a restart to recruitment activity and phased returns to work after furlough leave. Service providers reporting a fall in employment often commented that sharply reduced workloads had meant redundancy measures were operating in tandem with furlough schemes.

Chris Williamson, Chief Business Economist at IHS Markit, said: "June’s PMI data add to signs that the economy looks likely return to growth in the third quarter, especially given the further planned easing of the lockdown from 4th July. June saw a record rise in the PMI for a second successive month, confirming that the economy is moving closer to stabilising after the worst of the immediate economic impact from the COVID-19 pandemic was felt back in April.

"However, while confidence is rising that the economy will soon return to growth as the lockdown continues to ease, the longer term recovery prospects remain highly uncertain. Some of the recent gains in the PMI reflect short-term bounces as businesses returned to work, but demand clearly remains weak, as indicated by a further steep decline in backlogs of orders and an ongoing fall in new orders. Many COVID-19 restrictions and social distancing measures will also need to stay in place until an effective treatment or vaccine is available, curbing demand in a variety of service sectors in particular.

"Uncertainty over recovery prospects and job prospects also mean demand for many goods, especially non-essential bigticket items, is likely to remain weak for many months, with Brexit uncertainty also continuing to cast a shadow over the economy.

"Our forecasting team therefore expects the economy to contract by 11.9% this year before expanding by a relatively modest 4.9% in 2021, which is far more cautious than the 15% surge anticipated in 2021 by the Bank of England."

Duncan Brock, Group Director at CIPS, said: "At the end of the second quarter we saw some uplift in the UK private sector as lockdown eased, businesses started opening up and activity increased from the crippling lows of the last few months.

"Though the index still remained below the no-change mark in June, its rise since May was a survey record, creating another signal that some bounceback has started to emerge following April’s historic lows. This is just a beginning however as business spending remains flat and supply chains stutter into action.

"Manufacturing was the strongest of the two registering above the no change mark and optimism rose to its highest levels since September 2018. Services remained weakened and still in contraction and there are deep concerns about how the end of furlough support will affect employment levels in the next few months.

"In general, this is good news for the UK economy, but in terms of any significant recovery, 2020 is likely to be a write-off. The following year may see some more stability and real growth as the pandemic’s effects continue to ripple through the remainder of 2020."

Trudy Salandiak

Corporate Communications

CIPS T: +44-1780-761-576

trudy.salandiak@cips.org

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