The downward revisions to March’s PMIs confirm that the measures taken to slow the spread of the coronavirus have pushed the economy into a recession of unprecedented scale and depth.
Downward revisions confirm lockdown has led to a huge loss of activity
- The downward revisions to March’s PMIs confirm that the measures taken to slow the spread of the coronavirus have pushed the economy into a recession of unprecedented scale and depth.
- The responses received between the 20th and 27th of March dragged down the headline services PMI from the flash estimate of 35.7 (based on responses received between 12th and 20th March) to 34.5. The flash reading was already a record low. The fall in the Italian services PMI from 52.1 in February to 17.4 in March, which reflects the earlier lockdown there, suggests the UK PMI will fall further in April as the full effect of the lockdown is felt.
- The services sector has, unsurprisingly, been hardest hit. But there was also a small downward revision to the manufacturing output PMI, from 44.3 to 43.9.
- The final composite PMI was dragged down from 37.1 to 36.0. That is a record low too. Based on past form it is consistent with a contraction in quarterly GDP of -2% to -2.5%. But if based only on the responses received after the 20th March, to reflect better the impact of the lockdown (imposed on 23rd March), the composite PMI would have only been 30.0. That is consistent with GDP falling by more than 3%. (See Chart 1.)
- If anything, even this is likely to underestimate the hit to GDP. The PMI is derived from how widespread reports of falling output are as opposed to how deep they are. The fact that many firms have had to cease trading altogether means the true picture is much worse.
- This is, of course, a direct consequence of the government’s policy of shutting down parts of the economy in order to slow the spread of the coronavirus so that the NHS can cope. Rather than GDP, policymakers are focusing on limiting the fall in employment and preventing viable businesses from going bust so the economy can hit the ground running after the virus passes. This makes the composite employment PMI interesting. It fell from 50.6 in February to 43.6 in March which is consistent with a 1% fall in employment.
- We are forecasting a 15% q/q drop in GDP in Q2. That would be a larger fall in output than in the financial crisis or the Great Depression. Our base case is that the recession won’t be as protracted as in either of those episodes. But recent evidence that unemployment is shooting up despite the government’s support package raises the risk that the recovery takes longer than we expect.
Chart 1: IHS Markit/CIPS Composite PMI & GDP
Sources: IHS Markit, Refinitiv
Andrew Wishart, UK Economist, +44 7427 682 411, email@example.com