The eye-watering declines in April’s flash PMIs confirm the coronavirus lockdown has pushed the economy into a recession of unprecedented speed and depth. Particularly worrying was the large drop in the employment balance which supported our view that a perfect V-shaped recovery is extremely unlikely.
Survey points to unprecedented monthly contraction in GDP in April
- The eye-watering declines in April’s flash PMIs confirm the coronavirus lockdown has pushed the economy into a recession of unprecedented speed and depth. Particularly worrying was the large drop in the employment balance which supported our view that a perfect V-shaped recovery is extremely unlikely.
- The slump in the composite PMI to 12.9 in April, the lowest in the survey’s 22-year history, was below our downbeat projection of 26.7 and will have come as a shock to most economists who had anticipated a far smaller hit to business activity from the lockdown (consensus forecast 31.4). The decline took the PMI below the low recorded in China (27.5) and April’s 13.5 reading for the euro-zone composite PMI.
- The composite PMI is consistent with GDP contracting by at least 6% m/m in April – as big as the fall seen during the whole of the global financial crisis. (See Chart 1.) And the survey is not even capturing the full extent of the damage since it only captures the proportion of firms that report a fall in activity, not how poorly each firm is doing. It also excludes the retail sector and the output of the self-employed, both of which are being hit particularly hard. We expect the actual fall in GDP in April to be nearer 20% m/m.
- The most shocking numbers came from the services PMI, which slumped from 34.5 to 12.3 (consensus 29.0 CE 25.0). Meanwhile, the manufacturing PMI sank from 47.8 in March to 32.9 (consensus 42.0, CE 40.0), its lowest level in the survey’s 28-year history. And the latter understates the recent weakness, since it received a 2.7-point boost from the lengthening in suppliers’ delivery times – which is usually a sign of strong demand but in this case is a reflection of supply chain disruptions. The manufacturing output and new orders balances fell even further to 16.6 and 20.0 respectively.
- The sub-indices were just as worrying. The composite employment index recorded a 17.7-point drop from 43.6 to 25.9, below the previous low of 38.0 reached at the height of the GFC. This suggests that employment may have fallen by about 5% y/y. That’s despite the government’s Job Retention and Self-Employment Income Support Schemes, which an ONS survey suggests have resulted in 27% of the workforce (9 million) workers being furloughed. So evidence of a drop in employment is a warning that incomes and demand are likely to remain depressed for a long time to come, thereby dampening the prospects for a swift economic recovery once the lockdown ends.
- Overall, the figures confirmed that the UK is destined for the sharpest fall in economic output for over a century in Q2 and provided further support to our view that even by the end of 2022 the economy may be 5% smaller than it would have been if the virus had never existed.
Chart 1: Composite PMI & GDP
Sources: IHS Markit, Refinitiv
Ruth Gregory, Senior UK Economist, +44 7747 466 451, firstname.lastname@example.org