Covid-19 continues to weigh heavily on UK economy - survey

The UK's private sector struggled in May, a widely-watched survey published on Thursday found, as Covid-19 lockdown measures weighed heavily on the economy.

The rate of decline in output did, however, ease compared to April’s historic slump.

The flash reading of the IHS Markit CIPS UK Composite PMI was 28.9 in May, an improvement on April’s final reading of 13.8 and a two-month high. It was also above analyst forecasts for a reading of 25.7.

It remains, however, a record low, well below the 38.1 seen at the height of the global financial crisis in November 2008 and only beaten by April's reading. Anything below the neutral reading of 50.0 is regarded as a contraction.

The sluggish output was attributed “almost exclusively” to Covid-19, which has shut businesses, seen customers cancel orders and caused demand to plummet.

Within the composite index, the UK Services Business Activity Index was 27.8, up on April’s 13.4; manufacturing output rose from 16.3 to 34.9; and manufacturing PMI was 40.6, compared to the previous month’s reading of 32.6.

Employment across the private sector fell rapidly, with the rate of contraction the second-fastest in more than 20 years and beaten only by that seen in April.

Chris Williamson, chief business economist at IHS Markit, said: “The UK economy remains firmly locked in an unprecedented downturn, with business activity and employment continuing to slump at alarming rates in May.

“Although the pace of decline has eased since April’s record collapse, May saw the second largest monthly falls in output and jobs seen over the survey’s 22-year history, the rates of decline continuing to far exceed anything seen previously.

“Travel and tourism firms, hotels, restaurants and producers of consumers goods were again the hardest hit, but this remains a shockingly broad-based downturn, with very few companies left unscathed by the Covid-19 pandemic."

Duncan Brock, group director at CIPS, said: “As the sectors prepare for further easing in restrictions and becoming covid-ready for staff to return, the danger on the horizon is a second wave of infections threatening the health of the nation and dampening consumer confidence still further.

“In addition, if this intensity of job cuts continues, purse strings will be drawn tightly shut and spending severely curtailed, putting further pressure on the UK economy and ensure any recovery is many years in to the future.”

Howard Archer, chief economist adviser to the EY Item Club, said: “While the May purchasing managers’ survey supports hope that the UK economy will improve as lockdown restrictions are gradually eased, it still leaves little doubt that the UK remains headed for substantial, record GDP contraction in the second quarter.

"We expect GDP contraction around 15% quarter on quarter over the second quarter, and around 8% over 2020. This assumes that there is a gradual further lifting of the lockdown over the coming weeks.”

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “In reality, the PMI is best seen as a loose measure of business confidence, with any reading below 50 significantly below average levels of sentiment. This tendency has been demonstrated over the last four years of heighted Brexit uncertainty, which hit business confidence but did not drag as severely on day-to-day economic activity.

“Right now, daily data on motor vehicle journeys and energy consumption, alongside weekly data on retail sales, show that the economy hit rock bottom in early April and has begun to recover in May.

“Accordingly, we have tentatively pencilled in a 3% month-to-month rise in GDP in May, following a decline of about 20% in April, and then bigger gains of 6% in June and 8% in July as schools, shops and eventually consumer services providers reopen.”

The IHS Markit CIPS May survey was conducted between 12 and 19 May.