The fall in October’s Flash activity PMI comes before the full force of the latest COVID-19 restrictions are felt and supports our view that GDP will stagnate, if not contract, in the last three months of the year. If the economy is heading for a double-dip, at least the second leg down will be smaller than the first.
Heading for a double-dip
- The fall in October’s Flash activity PMI comes before the full force of the latest COVID-19 restrictions are felt and supports our view that GDP will stagnate, if not contract, in the last three months of the year. If the economy is heading for a double-dip, at least the second leg down will be smaller than the first.
- The fall in the composite PMI from 56.5 in September to 52.9 in October was the second in a row and was sharper than the consensus forecast of a drop to 53.9. It suggests that the extra COVID-19 restrictions are already taking their toll on activity.
- As manufacturers are less exposed to the advice to work from home and the 10pm curfew on hospitality announced in late September, the manufacturing PMI fell by less (from 54.1 to 53.3) than the services PMI (from 56.1 to 52.3). This took the services PMI below the manufacturing PMI for the first time since June.
- The divergence is even starker on the new orders balances. Although the manufacturing new orders balance did decline, from 55.6 to 54.1, the fall would have been bigger if it wasn’t for the rise in the new export orders balance from 53.4 to a 32-month high of 54.4. Respondents suggested that was due to rising demand from the China and the US (who have enjoyed stronger recoveries from the COVID-19 recession than most) and a temporary boost from businesses in Europe stockpiling ahead of Brexit. There is still not much evidence that domestic businesses are boosting their stocks like they did ahead of previous Brexit deadlines.
- In contrast, the fall in the new orders balance of the services PMI, from 54.5 to 47.8, was bigger and left it below the 50 no-change level for the first time since June. This isn’t surprising given that the bulk of the latest COVID-19 restrictions predominantly affect the travel, leisure and hospitality sectors.
- The composite PMI is not currently a good gauge of the level or growth rate of GDP, so there’s little comfort in it still being above the boom/bust level of 50. Instead, it is the trajectory that’s worrying. And this is before the tighter COVID-19 restrictions implemented in recent weeks, which have forced the hospitality sector in a number of regions to close again, have been felt. As such, it might not be long before the PMIs are back below 50 anyway.
- The second rise in a row in the composite employment balance (from 42.7 in September to 43.1) offers some consolation. At face value, that’s consistent with only a 1% fall in employment. (See Chart 1.) But given that employment has already fallen by 1.5% even before the original furlough scheme ends on 31st October (the replacement is less generous and less widespread), we suspect it is underplaying the weakness.
- Overall, the PMIs suggest you shouldn’t read too much into the decent rise in retail sales in September released earlier today. Instead, the renewed downward trend in the PMIs provides a better sense of what’s happening to the overall economy. And it’s not looking good.
Chart 1: Composite PMI Employment Balance & Employment
Sources: IHS Markit, Refinitiv
Paul Dales, Chief UK Economist, +44 7939 609 818, firstname.lastname@example.org