The surge in the composite PMI to 57.1 in July is an encouraging sign of further recovery, but it is not an indication that GDP has recovered to its pre-virus level. We don’t expect that to happen until 2022.
Encouraging, but economy still well below pre-crisis levels
- The surge in the composite PMI to 57.1 in July is an encouraging sign of further recovery, but it is not an indication that GDP has recovered to its pre-virus level. We don’t expect that to happen until 2022.
- It’s worth reiterating that the PMI does not indicate the level of activity but instead month-on-month changes in activity. So while encouraging, the rise in the composite PMI from 47.7 in June to 57.1 in July, above the consensus forecast of 51.1 and the expansion/contraction level of 50 for the first time since February, it doesn’t suggest that the economy is anywhere near back to normal.
- Recently the PMI has not been a reliable guide to GDP growth either. It was below 50, signalling contraction, in May and June when we know GDP started to grow again. So it is hard to glean much useful information from the survey about the speed of recovery.
- Even comparing the UK PMI with the euro-zone PMI or looking at the sectoral balances is fraught with difficulty. The rise in the UK composite PMI to 57.1 in July put it above the 54.8 reading in the euro-zone. (See Chart 1.) But this is due to more of the UK economy opening up in July (more of it happened in June in Europe) rather than the UK economy having recovered quicker overall. That’s is clear from our real-time recovery trackers. (See here.)
- Meanwhile, the rise in the services PMI from 47.1 in June to 56.6 in July was promising as it suggests that a solid recovery has taken hold in the sector. Indeed, it was higher than the manufacturing PMI, which increased from 50.1 to 53.6. But again, this reflects the later opening of the services sector compared to manufacturing that meant more businesses recorded rises in output. The level of manufacturing activity is probably much closer to pre-virus levels than services activity.
- The only unambiguous message from the survey is that despite the apparent strength in output, firms are planning on laying off more workers. The composite employment balance fell from 39.6 in June to 38.9 in July, which is consistent with a 2% y/y drop in employment.
- The strong PMIs combined with retail sales returning to their pre-virus level in June may lead to hopes that the overall economy will get back to pre-crisis levels quickly. But the initial rebound was always going to be quick as the economy reopened. We think that the next leg will be slower as some sectors continue to be hampered by social distancing and some workers lose their job when the furlough scheme ends. We think it will take until 2022 for GDP to recapture its pre-virus level.
Chart 1: Composite PMI (Balances)
Source: IHS Markit
Andrew Wishart, UK Economist, +44 7427 682 411, firstname.lastname@example.org