The nature of the PMIs makes them tricky to interpret, but the rise in the composite PMI from 13.8 in April to 28.9 in May probably shows that April was the low point for activity, and that the slight easing in the lockdown on 13th May has led to some businesses reopening. But it looks as though the recovery will be slow.
Activity still well below normal
- The nature of the PMIs makes them tricky to interpret, but the rise in the composite PMI from 13.8 in April to 28.9 in May probably shows that April was the low point for activity, and that the slight easing in the lockdown on 13th May has led to some businesses reopening. But it looks as though the recovery will be slow.
- Taken literally the fact the flash composite PMI remained well below 50 in May 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. Indeed, a return to 50 in the equivalent manufacturing PMI for China corresponded with industrial output recovering to its pre-lockdown level. As a result, we think the UK survey suggests that the low point for activity was reached in April, but that it is still well below normal in May.
- The rebound in the manufacturing PMI from 32.6 to 40.6 is probably a sign that some industrial plants have reopened on government advice. And the services PMI rose from 13.4 to 27.8, in line with anecdotal evidence that firms have restarted limited operations, such as take-out options from restaurants. That chimes with the results of the latest “Business Impact of COVID-19” survey published by the ONS, which showed that many firms restarted operations around the start of the month, particularly in the accommodation and food services sector.
- At face value, the composite PMI is now consistent with quarterly GDP growth in Q2 of -3% rather than -5%, but as we have discussed previously, the PMI fails to capture the depth of the fall in activity. Meanwhile, the composite employment balance ticked up from 26.4 to 31.9. That is consistent with a 4% drop in employment, which is close to our forecast. Perhaps the most useful message from the PMI comes from the comparison with China, where a recovery is much more advanced. The larger and more protracted fall in the PMIs in the UK and Europe suggests the economic hit from the virus will be longer lasting there. (See Chart 1.)
- Overall, while April may have marked the trough in activity, social distancing restrictions are continuing to depress activity severely. Our assumption that most of the lockdown is in place throughout Q2 and then eased gradually seems to be on track, which is why we continue to expect GDP to fall by about 20% q/q in Q2 following the 2% q/q fall in Q1. And much more importantly, we expect the subsequent recovery to be sluggish.
Chart 1: Composite PMI (Balances)
Source: IHS Markit
Andrew Wishart, UK Economist, +44 7427 682 411, firstname.lastname@example.org