Services sector sees lower-than-feared contraction in lockdown 2.0

A 'Sorry We're Closed' sign on a shop door (PA Wire)
14:39pm, Thu 03 Dec 2020
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Activity in Britain’s services sector slammed into reverse last month during England’s second national lockdown, but the impact was less severe than first feared, according to new figures.

The closely-watched IHS Markit/CIPS services purchasing managers’ index (PMI) showed a reading of 47.6 for November, down sharply on the 51.4 in October as non-essential shops, pubs and restaurants were forced to close their doors.

It marked the first contraction since June, with a reading below 50 signalling a decline in activity.

But the impact was not as bad as the initial 45.8 flash estimate given last month and April’s record low of 13.4 seen during the spring lockdown.

The composite PMI for the wider private sector was also revised higher, while the figures showed a surge of optimism over the outlook among firms.

Some experts said the more resilient performance amid the lockdown suggests there may be a smaller contraction in the fourth quarter of 2020.

The data revealed a composite reading of 49 in November against 52.1 in October, though this is almost two points higher than last month’s 47.4 flash composite estimate.

The more resilient performance in the second lockdown and recent good news on Covid-19 vaccines saw optimism across the private sector reach its highest level since March 2015.

The collateral damage on areas outside of hospitality, leisure and travel has been far more modest than in the first lockdown period

Tim Moore, economics director at survey compiler IHS Markit, said: “New lockdown measures and tighter pandemic restrictions unsurprisingly tipped UK private sector output back into decline during November.

“However, the collateral damage on areas outside of hospitality, leisure and travel has been far more modest than in the first lockdown period.”

The EY Item Club said it is now possible that gross domestic product (GDP) will fall by less than it expected between October and December, while Philip Shaw, at Investec, said the November PMI means it is “not guaranteed” that there will even be a contraction.

“The likely fall in economic activity hasn’t been as bad as we thought or feared,” he said.

But Duncan Brock, group director at the Chartered Institute of Procurement & Supply (CIPS), warned that it could be spring before a sustained recovery is seen.

“We can only hope that businesses can batten down the hatches and, with grit and determination, get through the next few months,” he said.

“It could be spring until a more sustainable recovery appears, buoyed up by vaccine hopes and when lost workforces can return again.”

Samuel Tombs, at Pantheon Macroeconomics, said he believes the PMI does not reflect the full extent of the impact of the one-month lockdown, and is pencilling in a GDP fall of around 5% in November.

“We doubt that the drop in GDP in November was as modest as the composite PMI implies,” he said.

“Many businesses that were forced to close last month during the second lockdown will have seen revenues drop to near-zero.”

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