CIPS News


Slump in UK service sector output as COVID-19 pandemic continues in April

CIPS 5 May 2020

Around 79% of survey respondents reported a drop in business activity during April, which was almost double the survey-record set in March (43%).

IHS MARKIT / CIPS UK SERVICES PMI®

- Record declines in activity, new work and employment

- Input costs fall for first time since survey began in 1996

- Business expectations up only fractionally since March

April data indicated a reduction in UK service sector activity on an unprecedented scale since the start of the survey in July 1996, reflecting emergency public health measures to stem the coronavirus disease 2019 (COVID-19) pandemic. The headline seasonally adjusted IHS Markit/CIPS UK Services PMI® Business Activity Index registered 13.4 in April, down sharply from 34.5 in March, to signal a rapid decline in UK service sector output. The earlier 'flash' reading for April was 12.3. Prior to the last two months, the survey-record low stood at 40.1 in November 2008.

Around 79% of survey respondents reported a drop in business activity during April, which was almost double the survey-record set in March (43%). Reduced volumes of activity in April were of course overwhelmingly attributed to either business closures, shutdowns among clients or shrinking sales due to a slump in non-essential spending.

Close to one-in-seven survey respondents (14%) commented on unchanged business activity since March, which was often viewed as a successful outcome after enacting business continuity plans and home working.

Mirroring the trend seen for business activity, latest data signalled survey-record declines in new work, backlogs and employment across the service economy. The small minority of firms reporting growth in new business during April mainly attributed it to online consumer spending, public sector contract awards and demand for services related to remote working. Some financial service providers also commented to resilient volumes of new business.

Adding to downward pressure on sales volumes, new business from abroad slumped in April, with transport, tourism and leisure companies often commenting on cancellations of all overseas bookings. Service sector firms also noted that international travel restrictions and business closures led to stoppages on new projects with clients in Europe, the US and Middle East.

Around half of the survey panel (49%) indicated a decline in payroll numbers during April. There were widespread reports that linked lower employment to the use of the UK government job retention scheme. However, service providers also commented on redundancies at their businesses amid severe cash flow constraints, which could lead to additional job cuts among those currently placed on furlough if support was not extended through the coming months.

A combination of lower payrolls costs, fuel prices and office overheads led to a drop in average cost burdens for the first time since the survey began in July 1996. That said, price discounting deepened in April, with the rate of decline in average charges among service providers the fastest in the survey history.

Business expectations for the next 12 months picked up very slightly from March's record low. However, service providers widely noted that their business operations were unlikely to return to normal in the immediate future.

Composite PMI indices are weighted averages of comparable manufacturing and services PMI indices. Weights reflect the relative size of the manufacturing and service sectors according to official GDP data.

The UK Composite Output Index is a weighted average of the UK Manufacturing Output Index and the UK Services Business Activity Index.

At 13.8 in April, the IHS Markit/CIPS UK Composite Output Index fell sharply from 36.0 in March and was by far the lowest recorded since the series began in 1998. The final index reading was slightly higher than the earlier 'flash' reading of 12.9 in April.

Service sector activity (index at 13.4) dropped at a slightly steeper rate than manufacturing output (16.3), with the latter supported to some extent by food and drink, pharmaceuticals and other healthcare-related production.

April data also pointed to survey-record declines in new business volumes, backlogs of work and employment across the UK private sector. In each case, the rate of contraction was faster in the service economy than the manufacturing sector, reflecting widespread business closures and shrinking customer demand.

Tim Moore, Economics Director at IHS Markit, which compiles the survey: “April's PMI data highlights that the downturn in the UK economy during the second quarter of 2020 will be far deeper and more widespread than anything seen in living memory.

"Historical comparisons of the PMI with GDP indicate that the April survey reading is consistent with the economy falling at a quarterly rate of approximately 7%, but we expect the actual decline in GDP could be even greater, in part because the PMI excludes the vast majority of the self-employed and the retail sector.

"Just one-in-five service providers managed to avoid a drop in business activity since March, and those hardest hit by social distancing measures and travel restrictions often reported complete stoppages of business operations.

While output, new work and employment indices all hit all-time lows in April, survey respondents indicated a tentative upturn in their business expectations amid hopes that a gradual re-opening of the economy can be achieved in the summer. However, service providers looking to re-establish business operations overwhelmingly commented that capacity would remain well below previous levels for an extended period and any timings remain highly uncertain.

"Those relying on travel, social gatherings or faceto-face business continue to report severe cash flow concerns and mounting worries about retaining staff without an extended period of government support."

Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply, said: “The services sector reached a stasis in April as the engine of business was put to sleep and the flow of new customers was cut off amidst public health concerns.

“The PMI graphs visibly show cataclysmically low levels of domestic and export new orders, along with outstanding business as companies simply shut up shop. Firms also resorted to quick redundancies to avoid bankruptcy or made use of the furlough scheme to suspend operations as job creation halted apart from some online operations or digitally-focused activity.

“Though a further downturn was anticipated after last month’s historically low figures, the scale of this fall is unnerving. A significant number of businesses in shutdown now may never reopen. Even with some movement in the lifting of restrictions on business activity, the UK economy is not a tap that can just be turned on. The flow of activity will take planning, Government support and an end to the pandemic in sight to have a strong effect on the biggest driver in the UK economy."

CIPS

Trudy Salandiak

Corporate Communications

T: +44-1780-761576

trudy.salandiak@cips.org

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