While the PMIs are tricky to interpret at the moment, the recovery in the all-sector PMI from a trough of 13.4 in April to just shy of 50 in June is another sign that there has been a strong initial rebound from the lockdown. However, still-depressed employment intentions suggest that there is worse to come for the labour market.
Economy rebounding but worse to come for the labour market
- While the PMIs are tricky to interpret at the moment, the recovery in the all-sector PMI from a trough of 13.4 in April to just shy of 50 in June is another sign that there has been a strong initial rebound from the lockdown. However, still-depressed employment intentions suggest that there is worse to come for the labour market.
- The bigger-than-expected rise in the construction PMI from 28.9 in May to 55.3 in June (consensus 47.0) released today alongside the already-published increases in the Manufacturing PMI (from 40.7 to 50.1) and the Services PMI (from 29.0 to 47.1) takes the all-sector PMI from 29.9 in May to 48.3 in June. Technically of course, any reading below 50 means the economy has contracted month-on-month. But we know this isn’t the case, so it appears some firms are instead giving an indication of how activity compares to normal.
- Overall, we think that activity is returning and quite quickly, but is still some way below the pre-virus level. That chimes with other timely data. For instance, retail sales recovered almost half of their peak-to-trough fall in May, and car sales were down “just” 35% y/y in June compared to a fall of 90% y/y in May.
- Historically, the average reading of the all-sector PMI in Q2 of 30.5 is consistent with GDP falling by about 3% q/q. The actual fall will be far larger, in the ballpark of 15-20%. That reflects the fact that the PMI survey measures what proportion of firms are reporting a fall in activity as opposed to how severe the drop in turnover has been. In this crisis, with 13% of firms still closed and 40% reporting that revenue is more than 20% below normal in the first fortnight of June according to the ONS’s bespoke Business Impact of Coronavirus Survey, this shortcoming of the PMIs has been particularly apparent.
- What the survey tells us about the impact of the crisis on the labour market is more concerning. While the employment balance of the all-sector PMI rose from 32.0 in May to 39.8 in June, it still suggests a sharp fall in employment is in store. (See Chart 1.) That’s why, barring a generous extension of the furlough scheme in the Chancellor’s fiscal statement on Wednesday, we think that the unemployment rate will rise from 3.9% in April to a peak of 7% in mid-2021. (See here.)
Chart 1: All-Sector Employment PMI & Employment
Sources: IHS Markit, Refinitiv
Andrew Wishart, UK Economist, +44 7427 682 411, email@example.com