National lockdown hits service sector output
Private sector output contracted sharply in November as the second national lockdown shuttered the leisure and hospitality sectors, research showed on Monday.
The IHS Markit/CIPS flash UK composite output index fell to a six-month low of 47.4 in November, compared to October’s final reading of 52.1. A reading above the neutral 50.0 mark indicates growth, while a reading below it suggests contraction.
It was, however, better than expected, with most analysts looking for a reading of around 42.5.
The biggest drag on the index was the services sector. The flash UK services business activity index fell to 45.8, also a six-month low, against October’s final 51.4.
In contrast, manufacturing proved more resilient, with output rising to 56.3 against 55.8 in October, and the flash UK manufacturing PMI index reaching 55.2 from October’s 53.7.
IHS Markit said the underperformance of the services sector in relation to manufacturing was the widest in nearly 25 years, and reflected the "severe impact" the second lockdown was having on business activity.
Chris Williamson, chief business economist at IHS Markit, said: "A double-dip is indicated by the November survey data, with lockdown measures once again causing business activity to collapse across large swathes of the economy.
"Some confidence comes from the data suggesting that the impact of the lockdown has not been as severe as in the spring, and manufacturing has received a significant boost from inventory building and a surge in exports ahead of the UK’s departure from the European Union at the end of this year.
"However, while the lockdown will be temporary, so too will this pre-Brexit boost."
Duncan Brock, group director at Chartered Institute of Procurement & Supply, said: "With the biggest drop in private sector output since May, the end of the year unveils the different fates of the manufacturing and service sectors.
"News of potential vaccines bringing a return to normality lifted the mood with a big rise in optimism, to its highest level since March 2015. But in the meantime, with service businesses still shedding jobs at a head-spinning rate, the new year will be difficult as another recession waits on the doorstep."
The rate of decline in staffing numbers was the steepest for three months. The composite employment index was at 42.1, compared to 43.4 a month previously.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: "The composite PMI indicates that the second lockdown has been far less damaging for the economy than the first. It remained greatly above April’s record low – of 13.8 – and May’s 30.0 level.
"Nonetheless, the rise in manufacturing PMI reflects both stockpiling by EU customers…and current disruption at UK ports leading to greater delays in obtaining raw materials and components. Manufacturing output looks set to fall sharply in the first quarter, even if a Brexit deal helps to minimise future disruption, simply because overseas customers have brought forward their consumption to the fourth quarter.
"Meanwhile the decline in the employment index suggests that the chancellor’s decision to extend the Coronavirus Job Retention Scheme has done little to stem the flow of redundancies."
Howard Archer, chief economist advisor to the EY Item Club, said: "Elements of the survey were softer across the board. Joint new orders contracted for a second successive month, [and] services orders declined sharply, which outweighed a solid increase in manufacturing orders.
"Backlogs of work decreased at the fastest pace since June amid shrinking demand a lack of pressure on business capacity."
The EY Item Club is predicting a potential GDP contraction of around 4% in the fourth quarter, assuming that restrictions on activity remain appreciable overall after the English lockdown ends on 2 December. That would result in GDP contracting by around 11.5% in 2020.
IHS Markit sent questionnaires to survey panels of around 650 service providers and around 650 manufacturers between 12 and 19 November.