Sharpest increase in UK private sector output since October 2013, but the rate of job shedding accelerates in August

CIPS 21 August 2020

Total volumes of new work expanded for the second month running in August, with the latest increase the fastest since July 2014

IHS Markit / CIPS Flash UK Composite PMI®

- Flash UK Composite Output Index Aug: 60.3, 82-month high (Jul final: 57.0) - Flash UK Services Business Activity Index Aug: 60.1, 72-month high (Jul final: 56.5)

- Flash UK Manufacturing Output Index Aug: 61.6, 76-month high (Jul final: 59.3)

- Flash UK Manufacturing PMI Aug: 55.3, 30-month high (Jul final: 53.3)

UK private sector companies reported a sharp and accelerated increase in business activity during August, with both the manufacturing and service sectors continuing to experience a recovery in customer demand.

The headline seasonally adjusted IHS Markit / CIPS Flash UK Composite Output Index – which is based on approximately 85% of usual monthly replies – registered 60.3 in August, up from 57.0 in July and signalling the fastest rate of business activity expansion since October 2013. Manufacturing production (index at 61.6) increased at a slightly quicker pace than service sector activity (60.1) during the latest survey period.

Higher levels of private sector output were overwhelmingly attributed to the reopening of the UK economy after the lockdown period in the second quarter of the year and a subsequent increase in both consumer and business spending.

Total volumes of new work expanded for the second month running in August, with the latest increase the fastest since July 2014. New order growth was mostly linked to an accelerated reopening among corporate customers, alongside greater willingness-to-spend among UK households. Survey respondents often commented on the restart of projects delayed during the public health emergency, but continued to note that levels of demand remained well below those seen prior to the pandemic.

Concerns about the speed and duration of the recovery resulted in sustained job cuts across the private sector during August. In contrast to the positive trends for output and new orders, latest data indicated the fastest pace of decline in employment numbers since May. Lower payroll numbers were primarily attributed to Comment redundancy programmes in response to depleted volumes of work and the need to reduce overheads before the government’s job retention scheme winds down. A sustained decline in backlogs of work across the private sector economy also suggested that incoming new orders fell short of business capacity.

Average cost burdens increased at a solid pace in August, although the rate of inflation eased since the previous month. Survey respondents noted that higher fuel bills and rising costs for imported items had pushed up operating expenses, which was only partially offset by higher average prices charged. August data pointed to a setback for business expectations across the private sector economy. The index measuring growth projections for the next 12 months dipped for the first time since March, with some survey respondents citing concerns that the recovery will be slower than first expected.

IHS Markit / CIPS Flash UK Manufacturing PMI®

At 55.3 in August, up from 53.3 in July, the seasonally adjusted IHS Markit/CIPS Flash UK Manufacturing Purchasing Managers’ Index® (PMI®) – a composite single-figure indicator of manufacturing performance – posted above the crucial 50.0 no-change threshold for the third month running. Moreover, the latest PMI reading signalled the fastest improvement in overall business conditions since February 2018.

Strong expansions of production volumes and incoming new work were the main factors boosting the headline index during August. Manufacturing output increased at the steepest pace since April 2014, which highlighted a continued recovery from the low point seen in the second quarter of 2020. Goods producers noted that easing lockdown measures had led to a restart of their supply chains and efforts by customers to replenish inventories.

Despite reporting another month of improving demand, latest data indicated a steep and accelerated fall in employment. Moreover, business optimism eased slightly since July as some manufacturers began to cite worries about the sustainability of the recovery over the longer term.

IHS Markit / CIPS Flash UK Services PMI®

The seasonally adjusted IHS Markit/CIPS Flash UK Services PMI® Business Activity Index picked up to 60.1 in August, from 56.5 in July, which indicated the strongest rate of growth for six years.

New business volumes increased to the greatest extent since March 2015, with survey respondents often commenting on higher levels of consumer spending. Service providers noted that customer footfall had improved in August and easing lockdown measures had helped them to accelerate the restart of business operations. Hotels & Restaurants reported a notable boost from the Eat Out to Help Out scheme, while others in the leisure categories commented on a general rise in demand linked to the trend for staycations.

Mirroring the trends seen across the manufacturing sector, latest data revealed a setback for both employment and business optimism since July. The latest reduction in payroll numbers was the fastest since May, which service sector companies mostly linked to redundancy programmes following a slump in demand since the start of the pandemic. Moreover, business expectations for the year ahead eased in August, thereby ending a four-month period of rising optimism. Worries about the domestic economic outlook and the sustainability of the recovery were commonly cited by survey respondents.

Tim Moore, Economics Director at IHS Markit, said: "August's data illustrates that the recovery has gained speed across both the manufacturing and service sectors since July. The combined expansion of UK private sector output was the fastest for almost seven years, following sharp improvements in business and consumer spending from the lows seen in April.

"There were encouraging signs that customer-facing service providers have started to catch up with the rebound seen earlier this summer across the wider economy, with easing lockdown measures, staycations and the Eat Out to Help Out scheme all reported as factors supporting growth in August.

"Positive signals for the recovery of course need to be considered in the context of UK GDP shrinking by around onefifth during the second quarter of the year. Survey respondents often noted that it could take more than a year to return output to pre-pandemic levels and there were widespread concerns that the honeymoon period for growth may begin to fade through the autumn months. "Worries about the state of the UK economy and the highly uncertain outlook for the pandemic led to a setback for business expectations in August, with confidence about growth prospects dipping for the first time since the slump in March.

"Private sector firms reported another sharp fall in employment numbers as scarring from the pandemic and lingering doubts about the sustainability of recovery resulted in a need to cut overheads. The rate of job shedding accelerated since July, with survey respondents frequently noting that redundancy programmes had been running in tandem with efforts to return some staff from furlough."

Duncan Brock, Group Director at CIPS, said: "Driven by customer need and a greater appetite for spending, new order intakes across the sectors rose at the fastest rate since July 2014 as more projects started, staff returned and normality 2.0 was established. Manufacturing led the way with the strongest output growth since April 2014, and service companies reported the boost from government initiatives had brought more consumers back to restaurants and pubs as purse strings were loosened.

"However, as the UK heads for the deepest recession in living memory, any celebration is premature as firms moved from the protection of furlough schemes to the harsh reality of job shedding with employment levels declining at their fastest since May. Reducing headcount was a quick fix for many firms struggling to maintain strong supply chains and their position in the marketplace amidst higher raw material and import costs.

"With the fastest rise in activity in the private sector since October 2013, this shows an encouraging speed towards recovery which belies the fact there are still some dark forces at play. Rising inflation, the sustainability of the UK economy during a global pandemic and the poor employment figures means we’re not out of the woods yet."

Trudy Salandiak

Corporate Communications


T: +44-1780-761-576

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