The first conventional data for March confirmed that the coronavirus was having a massive negative impact on activity even before the Government stepped up the severity of its measures to slow the spread of the virus.
PMI already at record low before government restrictions bite
- The first conventional data for March confirmed that the coronavirus was having a massive negative impact on activity even before the Government stepped up the severity of its measures to slow the spread of the virus.
- The plunge in the composite PMI, from 53.0 in February to 37.1 in March, left it at its lowest level since the index started in 1998 (the previous low was 38.1, recorded during the financial crisis in November 2008). For what it’s worth, the average of the PMI survey in Q1 suggests GDP growth was -0.4% q/q. But the March reading is consistent with quarterly GDP of as low as minus 2% going into Q2. (See Chart 1.)
- The weakness was predominantly in the services sector, where the PMI fell from 53.2 to 35.7. Unsurprisingly, the forward-looking indices were particularly weak. The only crumb of comfort is that the employment balance recorded a relatively modest fall from 50.7 to 44.0, consistent with employment falling by “only” 1%. That chimes with our view that the labour market fallout will be relatively limited thanks to the government’s measures to subsidise up to 80% of some workers’ wages.
- The manufacturing sector has been less affected so far, with its PMI only falling from 51.7 to 48.0. Note, though, that part of this was due to a further rise in suppliers’ delivery times. Typically, this is a sign of strong demand. In this instance it is not a good sign as it instead reflects supply chain disruptions. If we take out the 2.2 point boost the balance has given the headline manufacturing PMI since January, it would be 45.8. That’s still not as bad as the services PMI. (Note this distortion doesn’t affect the composite PMI.)
- The fall in the PMIs is despite the survey being conducted between 12-20th March, and therefore too early to capture the full effect of the Government closing schools, restaurants, bars and gyms (on the 20th), and closing non-essential shops and requiring people to stay at home altogether from last night.
- The size of the fall in the PMI in other countries locked down before the UK suggests that the UK PMI will fall even further in April. The French composite PMI fell from 52.0 in February to 30.2 in March, and the Chinese composite PMI fell from 51.9 in January to 27.5 in February. So much worse lies ahead.
- And while the PMI captures the proportion of firms that report a fall in activity, it doesn’t take into account just how poorly each firm is doing. The fact many firms have had to cease trading altogether suggests things could be even worse than the survey suggests. That’s why we are forecasting a 15% q/q fall in GDP in Q2. That would be a larger fall in output than in the financial crisis or the Great Depression. But it should be a more temporary one.
Chart 1: Composite PMI & GDP
Sources: IHS Markit, Refinitiv
Andrew Wishart, UK Economist, +44 7427 682 411, email@example.com