The nature of the PMIs makes them tricky to interpret at the moment, but the rise in the composite PMI from 30.0 in May to 47.6 in June (consensus 41.0) suggests that the additional easing in the lockdown on 15th June has led to a further rebound in economic activity after the sharp fall in April.
Activity on the climb but still well below normal
- The nature of the PMIs makes them tricky to interpret at the moment, but the rise in the composite PMI from 30.0 in May to 47.6 in June (consensus 41.0) suggests that the additional easing in the lockdown on 15th June has led to a further rebound in economic activity after the sharp fall in April.
- Taken literally the fact that the flash composite PMI remained below 50 in June suggests that activity fell further, as anything below 50 suggests that activity declined compared to the previous month. (Firms are asked whether their level of output is higher, the same or lower than one month ago). But many respondents appear to be giving an indication of how activity compares to normal levels as opposed to the tightly defined question they are asked. As a result, the PMIs support other evidence that suggests that the low point for activity was reached in April, and that activity began to recover in May and took another step up in June. Indeed, although the slump was deeper in the UK and the euro-zone than in China, the recovery also seems to have been at least as steep. (See Chart 1.)
- The recovery in the manufacturing PMI from 40.7 to 50.1 (consensus 45.0) is probably a sign that industrial plants are some way on the road back to normality. Most industrial firms were encouraged to go back to work in May and many have made adjustments which allow them to work around the social distancing measures. And the services index recovered from 29.0 to 47.0 (consensus 40.0) as the easing of restrictions on non-essential businesses on 15th June allowed more firms to operate. What’s more, the PMI survey does not cover retail businesses, which were a big winner of the easing of restrictions. As such, the PMI is probably understating the economic recovery.
- However, output seems to be recovering much more quickly than employment. While the new orders balance of the composite PMI rose from 30.5 to 46.8 in June, the employment balance only crept up from 32.1 to 39.5. That is consistent with a 3% drop in employment, which is close to our forecast. This echoes the theme from the most recent Monetary Policy Committee (MPC) meeting on 18th June – the Committee has become less concerned about the impact on output from the lockdown and more concerned about the labour market. (See here).
- Overall, the economy seems to be recovering quicker from its nadir in April than we had first expected. This trend should continue in July as bars, restaurants and cinemas will probably be able to open from 4th July and a reduction in the official social distancing measure from 2m to 1m would allow those firms that are open to serve significantly more customers. As a result, GDP in Q2 as a whole may fall by 15%-20% rather than the 23% q/q we have pencilled in. The rise in Q3 could be bigger than our 15% q/q forecast as well.
Chart 1: Composite PMI (Balances)
Source: IHS Markit
Thomas Pugh, UK Economist, +44 7568 378 042, firstname.lastname@example.org