CIPS News


UK private sector output growth hits five-year high as reopening gathers momentum in July

CIPS 24 July 2020

July data indicated that manufacturing output expanded at the fastest pace since November 2017, which was primarily attributed to a sustained recovery in production capacity after the stoppages seen during the spring.

IHS Markit / CIPS Flash UK Composite PMI®

- Flash UK Composite Output Index Jul: 57.1, 61-month high (Jun final: 47.7) - Flash UK Services Business Activity Index Jul: 56.6, 60-month high (Jun final: 47.1)

- Flash UK Manufacturing Output Index Jul: 59.8, 32-month high (Jun final: 50.7)

- Flash UK Manufacturing PMI Jul: 53.6, 16-month high (Jun final: 50.1)

July data indicated a marked improvement in business conditions across the UK private sector economy following the easing of lockdown measures to contain the spread of the coronavirus disease 2019 (COVID-19). The latest survey indicated a return to growth for the service sector and a much faster rise in manufacturing production than seen in June.

At 57.1 in July, up from 47.7 in June, the headline seasonally adjusted IHS Markit / CIPS Flash UK Composite Output Index – which is based on approximately 85% of usual monthly replies – registered above the 50.0 no-change value for the first time since February. Moreover, the index has now risen for three months running after hitting a survey-record low of 13.8 in April. The July expansion was the fastest recorded since June 2015.

Survey respondents commented on a gradual increase in business activity following the lockdown period during the second quarter of 2020, helped by returns to work and a phased reopening of the wider UK economy. There were also some reports that clients had started to take a more long-term view when considering their spending plans.

However, service providers often noted that business capacity remained limited and operating costs had risen due to COVID-19 mitigation efforts, while those in the manufacturing sector also commented on the likelihood of a slow return to output levels seen prior to the pandemic.

UK private sector firms indicated a solid rebound in new order volumes during July, especially from domestic customers. That said, employment numbers continued to fall sharply, with the rate of job shedding accelerating since the previous month. Lower Comment staffing levels were typically linked to redundancies in response to subdued workloads and higher operating costs.

Business sentiment towards the year ahead outlook remained well above the low point seen during March. However, the speed of recovery moderated in July, as signalled by this index rising only slightly since the previous month.

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 – registered 53.6 in July, up from 50.1 in June and the highest since March 2019. The latest turnaround in the PMI from April's low point was driven by a stronger rate of output growth and a return to rising new order volumes, while another sharp fall in employment weighed on the headline index.

July data indicated that manufacturing output expanded at the fastest pace since November 2017, which was primarily attributed to a sustained recovery in production capacity after the stoppages seen during the spring. New business intakes meanwhile expanded for the first time in five months amid reopened supply chains and a recovery in customer demand from the worst phase of the lockdown.

Meanwhile, business optimism across the manufacturing sector reached its highest level since September 2014 and highlighted increased confidence towards near-term prospects. Around twothirds of the survey panel (66%) forecast a rise in production volumes during the year ahead, while only 12% expect a reduction.

IHS Markit / CIPS Flash UK Services PMI®

UK service providers indicated that business activity was firmly in growth territory during July. At 56.6, up sharply from 47.1 in June, the seasonally adjusted IHS Markit/CIPS Flash UK Services PMI® Business Activity Index signalled the fastest pace of expansion for exactly five years. Survey respondents mainly linked the rise in business activity to the reopening of their own sites and those of their customers.

Despite the restart of more parts of the service economy, especially leisure-related businesses, there were also reports that initial levels of demand had been weaker-than-expected. Concerns about the speed of recovery, as well as a strong upturn in non-staff costs, acted as a brake on employment numbers in July. Latest data indicated another rapid drop in staffing levels across the service sector and the rate of decline accelerated since June.

Around one-in-three survey respondents (34%) reported a fall in employment during July, while only 10% signalled an increase. There were again widespread reports that extremely weak demand had resulted in prolonged use of furlough arrangements and redundancy programmes running in parallel.

Chris Williamson, Chief Business Economist at IHS Markit, said: "The UK economy started the third quarter on a strong footing as business continued to reopen doors after the COVID-19 lockdown. The surge in business activity in July will fuel expectations that the economy will return to growth in the third quarter after having suffered the sharpest contraction in modern history during the second quarter.

"However, while the recession looks to have been brief, the scars are likely to be deep. Even with the July rebound there’s a long way to go before the output lost to the pandemic is regained and, while businesses grew more optimistic about the year ahead, a V-shaped recovery is by no means assured.

"New orders showed only a relatively small rise in July, indicating that demand remains worryingly low at many firms. Hence July saw yet another sharp cut to employment levels as increasing numbers of companies scaled back their operating capacity. Many households are therefore likely to remain cautious with respect to spending with the job market deteriorating.

"Furthermore, not only do many consumer-facing businesses remain especially hard-hit by the pandemic and ongoing social distancing, we remain very concerned about the extent to which the recovery could be smothered by a lack of postBrexit trade deals.

"July’s PMI represents a step in the right direction, but there is a mountain still to climb before a sustainable recovery is in sight."

Duncan Brock, Group Director at CIPS, said: "Following last month’s good results, recovery in July across the manufacturing and services sectors gathered pace as the PMI figure made a sudden jump to show the fastest growth since June 2015. This momentum was fuelled by the release of pent up demand as clients and customers returned to spending and businesses were able to open their operations as staff returned.

"Manufacturing lead the way by putting in its best output growth performance since November 2017. With business unfettered by lockdown, optimism rose to its highest levels since September 2014 amongst manufacturers, with an injection of hope that the worst impact from the pandemic was over. The services sector painted a similar picture with the best performance in five years and a sudden improvement from last month.

"Amidst this brightening picture, there were some winners and losers. Some parts of the economy performed better than others, both through luck with being early to reopen and good adaptation in responding to the challenges of the pandemic. The biggest concern is that staffing levels remained disappointingly low across both sectors, as furlough schemes came to an end and redundancies started to appear. As firms look to the future with concerns over the strength of the economy and any second wave hampering progress, Brexit looming on the horizon was also a concern that has begun to feature again for a number of businesses."

Trudy Salandiak

Corporate Communications

CIPS

T: +44-1780-761-576

trudy.salandiak@cips.org

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