The rebound in May’s all-sector PMI suggests the economy is now on the long road to normality. But the PMI echoes the message from the high frequency data that the recovery will be protracted.
PMIs confirm activity is returning only gradually
- The rebound in May’s all-sector PMI suggests the economy is now on the long road to normality. But the PMI echoes the message from the high frequency data that the recovery will be protracted.
- At 40.7 and 29.0 in May, the manufacturing and services PMIs released in recent days were marginally higher than the flash estimates. Meanwhile, May’s construction PMI, released for the first time today, rose from just 8.2 in April to 28.9, a little below the consensus forecast for a pick-up to 29.7. This left the all-sector PMI, which weights together all three surveys, at 29.9 in May, up from April’s low point of 13.4.
- Even so, with the all-sector PMI still remarkably low, the figures do little to alleviate our concerns that the recovery will be protracted. In fact, with the index remaining below the 50 mark which supposedly separates expansion from contraction, in theory it suggests that the economy shrank further in May relative to April. Given the gradual lifting of the lockdown restrictions and the re-opening of around 8% of previously shuttered businesses in the first few weeks of May, this seems unlikely. We suspect that many respondents are instead giving an indication of how activity compares to pre-crisis levels.
- Perhaps a more useful comparison is with other countries, such as China, where the recovery is more advanced. China’s composite PMI fell to a low of 27.5 in February and then rose to 46.7 in March. The smaller rebound in the UK suggests that the recovery will be more gradual here.
- What’s more, at 32.0, the all-sector employment balance is still consistent with about a 4% drop in employment, not much better than the 5% fall implied in April. (See Chart 1.) This supports our view that strains on household incomes will weigh on consumption for some time and that demand will be slow to fully recover. And despite edging up a touch from 43.9 to 46.3, the composite output prices balance still points to continued downward pressure on inflation.
- Finally, the ONS Business Impact of Coronavirus survey, also released today, suggests that although the government had given the green light to an easing in the lockdown restrictions on 13th May, by 17th May only 15.6% of closed businesses expected to open their doors in the next two weeks and around 25% over the next month.
- Overall, with the early evidence pointing to nothing more than a very gradual recovery after April’s low point, we are sticking with our forecast that GDP fell by 25% from its peak and that it won’t be until the end of 2022 that the economy recovers its pre-crisis level. That is why we think the Bank of England will need to do much more than the markets currently expect to get the economy back on track. Indeed, by this time next year, we suspect that the Bank will have announced an extra £350bn of QE. (See here.)
Chart 1: All-Sector PMI & Employment
Sources: IHS Markit, Refinitiv
Ruth Gregory, Senior UK Economist, +44 7747 466 451, firstname.lastname@example.org