January’s flash composite PMI is consistent with our view that the third lockdown, like the second, was much less damaging for the economy than the first lockdown in March/April 2020. But it suggests that our forecast for a 2% m/m fall in GDP in January may prove to be too optimistic.
Third lockdown far less damaging than the first
- January’s flash composite PMI is consistent with our view that the third lockdown, like the second, was much less damaging for the economy than the first lockdown in March/April 2020. But it suggests that our forecast for a 2% m/m fall in GDP in January may prove to be too optimistic.
- The drop in the composite flash PMI from 50.4 in December to 40.6 in January was sharper than the consensus forecast for a fall to 45.5. And it was far bigger than the fall in the flash PMI in the euro-zone from 49.1 to 47.5, as Brexit and January’s COVID-19 lockdown measures weighed on the UK index.
- The decline primarily reflected a drop in the services component. The fall in the services PMI from 49.4 to 38.8 (consensus 45.0) took the index below the level reached during November’s lockdown and to its lowest level since May 2020. But that still left the PMI far above the 13.4 it reached during the first lockdown in April 2020, with many businesses suggesting that efforts to adapt and prepare for the COVID-19 restrictions had been successful.
- At least the new orders balance did not fall quite as sharply, dropping from 48.5 to 42.8. And the future activity index ticked up from 73.1 to 73.9, suggesting firms are more upbeat about the near-term outlook. What’s more, the still-elevated input prices balance pushed the output price balance back above the 50 no-change mark for the first time in five months, perhaps a sign that firms are feeling confident enough about demand to pass on some of their higher costs to the consumer.
- Meanwhile, as manufacturers were relatively immune to the third lockdown, the manufacturing PMI fell by less (from 57.5 to 52.9). And that was despite the stocks of purchases balance knocking 1.5 points off the headline PMI, as firms no longer stockpiled as insurance against a no deal Brexit outcome. New orders also declined from 56.7 to 47.9, reversing the surge in export sales ahead of the Brexit deadline. Admittedly, the relative strength in the manufacturing PMI partly reflected a temporary boost due to the lengthening of suppliers’ delivery times, caused by Brexit disruptions to supply chains and COVID-19 border closures. Longer delivery times are usually associated with strong demand and so raise the headline index. But it was encouraging that the output balance remained above the 50 no-change mark and well above the low of 16.3 reached in April 2020.
- Taken together, the composite PMI points to a fall in GDP in January of about 5% m/m. (See Chart 1.) This suggests that the fall in GDP in January could be almost double the size of November’s 2.6% m/m decline. Although that drop would be mild in the context of the 18.8% m/m decline seen during the first lockdown in April 2020. Meanwhile, the fall in the composite employment balance (from 47.2 to 45.1) suggests that worse is yet to come for the labour market and that more support may be needed in the Budget on 3rd March.
Chart 1: Composite PMI & Monthly GDP
Sources: IHS Markit, Refinitiv
Ruth Gregory, Senior UK Economist, +44 (0)7747 466 451, firstname.lastname@example.org