Sharp slowdown in UK private sector output growth. New work declines for first time since June

CIPS 23 October 2020

Manufacturing production (index at 56.4) increased at a much faster pace than service sector activity (index at 52.3).

IHS Markit / CIPS Flash UK Composite PMI®

- Flash UK Composite Output Index Oct: 52.9, 4-month low (Sep final: 56.5)

- Flash UK Services Business Activity Index Oct: 52.3, 4-month low (Sep final: 56.1)

- Flash UK Manufacturing Output Index Oct: 56.4, 4-month low (Sep final: 59.0)

- Flash UK Manufacturing PMI Oct: 53.3, 3-month low (Sep final: 54.1)

UK private sector companies indicated another overall increase in business activity during October, but the rate of expansion slowed considerably since the previous month. This reflected a much weaker contribution from the service economy, with survey respondents often commenting on tighter restrictions across the hospitality sector and the impact of local lockdowns on general consumer spending. As a result, service providers reported a decline in new business for the first time since June, which contrasted with another solid expansion in new orders received by manufacturing companies in October.

The headline seasonally adjusted IHS Markit / CIPS Flash UK Composite Output Index – which is based on approximately 85% of usual monthly replies – registered 52.9 in October, down from 56.5 in September and further below August's recent peak of 59.1. Although still above the 50.0 no-change value, the latest reading pointed to the weakest rise in UK private sector output since a return to growth was first signalled in July.

Manufacturing production (index at 56.4) increased at a much faster pace than service sector activity (index at 52.3). In both sectors, the speed of recovery was the slowest for four months during October. Where a rise in output was reported, survey respondents pointed to factors such as pent up demand in the manufacturing sector, rising residential property transactions and the restart of work on projects that had been delayed at the start of the pandemic.

Lower business activity was mainly linked to renewed COVID-19 restrictions and shrinking demand from clients that have been hard hit by the slump in travel and hospitality. Total new business volumes across the UK private sector decreased during October, which ended a three-month period of Comment expansion. That said, the rate of decline was only modest and much less marked than seen in the second quarter of 2020.

October data indicated a steep fall in employment numbers, with another month of deep job cuts signalled in both the manufacturing and service sectors. Lower staffing numbers were primarily widely attributed to redundancies and the need to reduce operating costs amid shrinking customer demand.

Business expectations for the next 12 months eased again in October and the degree of confidence was the lowest since May. Mirroring the trend for current business activity, the worsening outlook was centred on the service sector. In contrast, manufacturers reported the strongest optimism since September 2014, driven by hopes of a sustained recovery in order books from the low levels seen earlier in the pandemic.

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 – dropped from 54.1 in September to 53.3 in October, to signal the slowest improvement in overall business conditions since July. The fall in the headline PMI reflected weaker rises in output and new orders, alongside a faster decline in staffing numbers across the manufacturing sector.

A number of manufacturers linked higher production to a gradual rebuilding of capacity after business shutdowns at the start of the pandemic. Some firms also commented on pent up demand and new enquiries from customers linked to the wider global economic recovery. New export orders increased at the fastest pace since February 2018. Survey respondents noted rising demand from clients in China and the United States, alongside a temporary boost from Brexit stock building among clients in Europe.

Pre-production inventories continued to fall across the UK manufacturing sector in October, albeit at the slowest pace since December 2019. There were some reports of inventory building in response to Brexit uncertainty, but this was more than offset by those manufacturers reporting a deliberate streamlining of stocks due to working capital pressures.

Meanwhile, the latest data indicated a sharp and accelerated rise in average cost burdens. The rate of input price inflation was the fastest for almost two years in October, which manufacturers often linked to the weak pound and higher commodity prices (particularly for steel, timber and petrochemicals).

IHS Markit / CIPS Flash UK Services PMI®

October data indicated a sharp loss of momentum across the service economy, with business activity growth easing for the second month running. Moreover, there was a reversal in customer demand, as signalled by a drop in new work for the first time since June, which contributed to another steep fall in staffing numbers.

At 52.3 in October, the seasonally adjusted IHS Markit/CIPS Flash UK Services PMI® Business Activity Index was down from 56.1 in September and well below August's recent peak of 58.8. The latest reading pointed to the worst performance for the sector since June.

Survey respondents overwhelmingly suggested that the latest setback for service sector output was due to a renewed downturn across the travel, leisure and hospitality industries amid tighter restrictions on trade and local lockdown measures.

Chris Williamson, Chief Business Economist at IHS Markit, said: "The pace of UK economic growth slowed in October to the weakest since the recovery from the national COVID-19 lockdown began. Not surprisingly the weakening is most pronounced in the hospitality and transport sectors, as firms reported falling demand due to renewed lockdown measures and customers being deterred by worries over rising case numbers.

"The slowdown would have been even more pronounced had it not been for exports rising as overseas customers sought to secure orders before potential supply disruptions as Brexit draws closer.

"The slower growth of output, the renewed fall in demand and further deterioration in the labour market suggest the economy started the fourth quarter on a weakened footing. While Brexit preparations may cause a short-term boost to some parts of the economy ahead of 31st December, rising COVID-19 cases and the imposition of local lockdown measures bode ill for the near-term economic outlook. While the fourth quarter still looks likely to see the economy expand, the rate of growth looks to have slowed sharply and the risk of a renewed downturn has risen."

Duncan Brock, Group Director at CIPS, said: "Fears over inherent weaknesses in the UK economy materialised this month with a sudden fall in the overall index showing a sharp drop in new orders and a continuing erosion of employment opportunities.

"Where some businesses were largely unaffected or were able to recoup losses quickly following the worst of the pandemic, consumer-facing businesses were the worst hit and some are now concerned about the prospect of total ruin. Either unable to fully open or tempt customers through the doors, hospitality firms saw their hands tied by further lockdown restrictions, safety measures for staff and customers, and the public more reluctant to leave their homes.

"Manufacturing companies had a better month as production remained steady, but at its slowest pace since July when the recovery first started to pick up speed. Sharper falls in job numbers as a result of redundancies and reduced customer demand along with higher prices for raw materials means the sector is still under pressure.

"Optimism fell to levels last seen in May, and unpredictability remains the only predictable conclusion for the remainder of the year. With more lockdowns, Brexit within touching distance and new government support at weaker levels than when the pandemic hit, it is clear businesses will have figure out their own survival tactics as the economy heads back towards square one."

Trudy Salandiak

Corporate Communications

CIPS T: +44-1780-761-576

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