UK economy 'close to stalling' even before lockdown

Tom Belger
·Finance and policy reporter
·2-min read
Pedestrians walks past a tube station, in central London January 18, 2011.  A record monthly jump in prices drove British inflation to an 8-month high in December, piling pressure on the Bank of England to raise interest rates and show it is not letting inflation get out of control.    REUTERS/Stefan Wermuth (BRITAIN - Tags: BUSINESS POLITICS)
New PMI data shines a light on how UK firms are coping with the virus. Photo: REUTERS/Stefan Wermuth

Firms across the UK economy had a worse month than expected by analysts in October, even before a new lockdown across England comes into force on Thursday.

New data from IHS Markit and the Chartered Institute of Procurement & Supply (CIPS) shows momentum fading for firms in services — from banks to cafes to the arts—as regional coronavirus restrictions tightened in parts of the country in October.

The purchasing managers’ index (PMI) data published on Wednesday is based on a survey of services firms, and is closely followed by investors and economists as a sign of the health of the UK economy. Services make up around four-fifths of the economy.

The seasonally adjusted index sees survey results turned into a headline figure between 0 and 100. Figures above 50 show the majority of respondents are reporting positive growth, while readings below 50 suggest declining activity.

READ MORE: UK factories losing steam as restrictions tighten

The reading fell sharply from 56.1 in September to 51.4 in October, showing a majority of firms still reporting growth but by a narrower margin than the previous month. Analysts had expected growth rates to remain unchanged.

“October data indicates that the UK service sector was close to stalling even before the announcement of lockdown 2 in England, with tighter restrictions on hospitality, travel and leisure leading to a slump in demand for consumer- facing businesses,” said Tim Moore, economics director at IHS Markit.

“This was only partly offset by sustained expansion in areas related to digital services, business-to-business sales and housing market transactions. The service sector as a whole recorded its slowest output growth since June, while new orders declined for the first time in four months.”

The figures suggest UK firms fared better than their peers in several other leading European economies, with readings below 50 in September and October for Spain, France, Italy and Germany. But services firms in Germany and Spain performed better than expected by analysts, however.

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It comes after similar PMI data on Monday showed the manufacturing sector also “losing momentum” and job losses accelerating in October. Manufacturing employment levels overall fell for a ninth month in a row, and spare capacity has increased as output and new orders have slowed.

The manufacturing PMI data showed makers of consumer goods saw output decline last month, blaming local lockdowns and falling demand among households as coronavirus infection rates have risen. Other manufacturers fared better.

Factories performed better than services however and remained firmly in growth territory amid strong export demand abroad particularly in China and the US, with a reading of 53.7.