Does the uptick in business activity indicate that British economy could recover soon?

Summary

• IHS Markit / CIPS August PMI for manufacturing and services sectors displays sharp business expansion
• However, the number of new orders were still short of the total production capacity for most respondents
• Consumer demand is up, but still below pre-pandemic levels
• Businesses also continued to lay-off staff during the survey period in August
• Most survey respondents felt that full economic recovery will be delayed beyond a year
• The main areas of concern are falling unemployment, rising government debt, the risk of a no-deal Brexit, and the lack of surety regarding the availability time of a Covid-19 vaccine

Both manufacturing and services sector PMI have grown at a faster than expected pace during the month of August 2020, according to the latest IHS Markit / CIPS Flash UK Composite PMI data.

Lates UK PMI Index Data from IHS Markit / CIPS Survey

(Source: markiteconomics.com)

The data was collected for the period between 12 to 19 August 2020. It revealed that the business activity has improved sharply for the mentioned period, as a result of a rise in consumer demand and business spending. The headline UK Composite Output Index rose to 60.3 in the month of August, as against a value of 57.0 registered in July 2020. It was the fastest rate of monthly expansion in business activity observed since October 2013.

Manufacturing PMI for the month of August was recorded at 61.6 while that for the services was valued at 60.1 for the same month.

PMI or the purchasing manager’s index is a variable that provides the direction of the economic activity in a sector. A level below 50 indicates contraction while above 50 denotes expansion in business activities for the period of the survey. It is usually done on a monthly basis by interviewing supply chain or purchase managers across various industries.

For August, company managers reported receiving a higher number of new orders as compared to July 2020, for both manufacturing and services industries.

With the easing up of the lockdown restrictions, the manufacturing supply chains have restarted for most businesses. The factories are now replenishing their inventory stocks. However, the number of new orders were still short of the total production capacity for most manufacturing respondents.

For services, footfalls have started to rise, though are still significantly below the pre-pandemic levels. Government’s Eat Out to Help Out scheme has benefitted the hospitality businesses by boosting their sales. Spending on staycations was also on the rise due to the ongoing summer holiday season, as per survey respondents.

The managers who responded to the survey also saw a rise in consumer demand across sectors; however, they added that it was still below the pre-pandemic levels.

The PMI survey results revealed that the month of August 2020 also saw job cuts, just like the earlier month of July. In fact, the month of August saw the highest rate of job losses, observed since May 2020. Companies said that they laid off workers to lower their overhead cost, before the government furlough scheme winds down in October 2020.

Moreover, costs were also seen to be rising during the month of August 2020, driven primarily by rising price of fuel and imported raw materials, despite a low level of prevailing inflation rate.

The managers surveyed said that the economic recovery would be slower than earlier expected. The economy might take more than a year to rebound to the pre-corona levels, they added.

Markets fail to cheer with the PMI data

The FTSE 100 index was down by almost 1 per cent to touch 5956 points on 21 August 2020, as the stock markets did not show any encouragement, after the release of the IHS Markit / CIPS PMI survey results for the month of August 2020.

Also Read: A Quick Insight on the Financial Performance of 3 FTSE 100 Stocks Withering the Storm

So how is the road to recovery coming along?

The path to recovery does not seem to be V-shaped and is still full of uncertainties with factors such as rising joblessness, the risk of a no-deal Brexit, high government debt levels, and the lack of surety regarding availability time of a Covid-19 vaccine.

Let us take a closer look at each of these factors.

Rising joblessness – The rate of unemployment is expected to more than double from the existing level of 4 per cent in the UK, and is a constant cause of worry. Businesses are running below capacity and have high operational costs to meet. Therefore, they are under pressure to continue to lay off staff. This factor is further depressing the already low consumer confidence in the nation and people are focusing on saving rather than spending, which is important for reviving the economy at this stage.

The risk of a no-deal Brexit – The UK and EU (European Union) have failed to make any progress regarding a post-Brexit trade deal till now. Both the parties are adamant on their side of negotiation points. Michel Barnier, EU’s chief negotiator has blamed the UK government for wasting their valuable time and said he was apprehensive that there will be no positive outcome of the negotiation talks. The negotiation deadline expires on 31 December 2020. As a result of a no free trade deal between UK and EU, Britain will definitely lose out all the benefits of a single European market.

Also Read: Boris Johnson and EU Chief to Hold ‘High Level’ Virtual Summit to End Post-Brexit Deadlock

High government debt – The coronavirus pandemic continues to put pressure on the British government finances. The national debt for UK has crossed the value of £2 trillion for the first time in the country’s history, according to the latest figures released by the Office for National Statistics (ONS). In July 2020, the British debt totaled £2,004 billion, which equaled 100.5 per cent of the country’s gross domestic product (GDP). Rishi Sunak, Chancellor of the UK Treasury is conscious of this fact and knows that he cannot keep increasing the public debt forever. He has already put his foot down for extending the popular furlough scheme. Private investment is also very low, and the nation is continuing to struggle to push up the economic output.

Also Read: Government Borrowings At An All-Time High, To Touch Five Times Its Last Year Value During Current Fiscal

Vaccine availability – the reality is that unless a coronavirus vaccine is actually made available to the masses in the country, the fear of the infection spread will not really go away so easily, just by government’s re-opening up the sectors one by one. The consumer demand returning to pre-pandemic levels and economy going back to sustainable growth levels is directly dependent on this most crucial factor, and the country shall need to wait for as long as it takes.

Also Read: Precious Metal Prices Go into A Correction Mode on News of Successful Vaccine Launch

To sum up, while it is a good news that the August IHS Markit / CIPS PMI Index has shown noticeable positive improvement and the Flash Composite Output Index has reached a value of 60.3, up from 57 observed in July 2020, but it may not translate into a seamless fast economic recovery for the nation in the months to follow. For the economic output to reach the pre-pandemic levels and start to grow in a sustainable manner, the crucial dampening factors to watch out for are rising joblessness, the risk of a no-deal Brexit, high government debt levels, and the non-availability of a coronavirus vaccine.