The sharp rise in the composite IHS Markit/CIPS Flash PMI in August provided further evidence that the recovery continued at a strong pace in Q3. Even so, we expect rising unemployment to put a brake on the recovery later this year.
Further signs recovery continued at a strong pace in August
- The sharp rise in the composite IHS Markit/CIPS Flash PMI in August provided further evidence that the recovery continued at a strong pace in Q3. Even so, we expect rising unemployment to put a brake on the recovery later this year.
- The increase in the composite PMI from 57.0 in July to 60.3 in August was much stronger than the consensus expectation of a small fall to 56.3 (CE 57.0). The services PMI rose sharply from 56.5 to a six-year high of 60.1, helped by the boost from the government’s Eat Out to Help Out restaurant discount scheme and the temporary VAT cut for hospitality/tourism.
- The manufacturing PMI jumped too, from 53.3 to 55.3 (consensus 53.8), its highest since February 2018. And that was despite the fact that workers were encouraged to return to work from 13th May meaning that the sector is further along the road to “normal” and there is now less scope for big gains.
- Admittedly, the survey has not been a reliable guide to GDP recently. It failed to capture the scale of the downturn and it was below 50.0, signalling contraction in May and June, when we know GDP started to grow again. So it is unlikely to be telling us much about the precise pace the recovery.
- But the sharp rise is clearly good news and chimes with the evidence from our “Capital Economics BICS Indicator” (see here) that suggests that the economy grew by 7.5% m/m in July and by a further 5.5% m/m in August, leaving GDP about 7.5% below its pre-crisis level.
- Even so, based on the experience in other countries, August’s UK composite PMI may prove to be the peak in the index, as the initial boost from re-opening the economy fades. The flash composite PMI in the euro-zone dropped sharply from 54.9 in July to just 51.6 in August. And China’s composite PMI fell from 55.7 in June to 54.5 in July, four months after its trough in February. (See Chart 1.) With the UK’s recovery lagging China’s by two months, that suggests that the UK composite PMI may slip back in September.
- What’s more, the composite employment index fell further from 39.6 in July to 38.7 in August, remaining well below the 50.0 level, suggesting the recovery in output hasn’t stopped firms from letting workers go. And unemployment will almost certainly rise further in the coming months as the job furlough scheme unwinds. (See here.) That is a key reason why we think that an impressive initial rebound of about +17% q/q in GDP in Q3, will give way to a much slower recovery later this year.
Chart 1: Composite PMI (Balances)
Source: IHS Markit
Ruth Gregory, Senior UK Economist, +44 7747 466 451, firstname.lastname@example.org