UK Services and Manufacturing Sectors Display High Growth

  • Jul 25, 2020 BST
  • Team Kalkine
UK Services and Manufacturing Sectors Display High Growth

Summary

  • IHS Markit/Cips UK Services PMI bounced to 56.6 in July 2020 compared to a value of 47.1 in the previous month of June
  • The recovery is seen to be broad-based across the sub-sectors
  • This is the fastest monthly growth observed since the past five years
  • CBI’s industrial trends survey reveals that manufacturing firms are hopeful of a rise in orders from the domestic market, while the export orders could decline during August to October 2020

On 24 July, IHS Markit/Cips released its flash estimates of the purchasing managers’ index (PMI) for the month of July 2020. All the indices registered remarkable improvement over the June levels including the composite output, services and manufacturing.

Having said that, the services PMI showed the highest monthly jump during July 2020. The jump in the PMI indices has come about as a result of a gradual increase in business activity during Q2 2020. The British economy started to re-open in a phased manner beginning 1 May 2020, after a nationwide lockdown was imposed on 23 March 2020.

The results of the PMI indices indicate that business conditions are improving steadily across the entire private sector in Britain, after the economy has re-opened. During April 2020, the IHS Markit/Cips Flash UK Composite Output Index hit an all-time low level of 13.8, which was a matter of great concern.

IHS Markit/Cips PMI is one of the most prominent indicators of economic activity. It is observed closely all over the world, including the UK.

Generally, a value of more than 50 indicates a rise in economic activity for the particular PMI index in question. On the other hand, a value of less than 50 points out to a contraction.

Let us take a closer look at the latest results of each of these indices.

Manufacturing PMI

The flash UK IHS Markit/Cips Manufacturing PMI Index settled at 53.6 in July 2020, as compared to a slightly lower value of 50.1 in the previous month of June. It has come as a result of a rise in the number of orders, demand, output capacity, and production on the one hand along with a fall in employment for manufacturing firms, on the other.

 

Flash IHS Markit/Cips Indices for the UK (July 2020)

Index

July 2020

June 2020 (final)

Composite Output

57.1

47.7

Services PMI

56.6

47.1

Manufacturing PMI

53.6

50.1

(Source: Markiteconomics)

Services PMI

The IHS Markit / CIPS Flash UK Services PMI jumped to 56.6 in July 2020, as compared to a much lower value of 47.1 registered a month back (June 2020). Employment across the services sectors has fallen, reducing the wage-bills. Demand is steadily seen to be on an upswing. An increase in the operations cost was witnessed due to the impact of imposing health safety measures at workplace, to contain the spread of corona infections.

A PMI index usually collects data from companies’ purchase managers around these five variables: delivery from suppliers, employment, inventory, orders, and output. It reflects trends in the present and futuristic business sentiments.

Also Read: Retail Sales Volume and Value Increases in the Month of June in the UK

CBI Industrial Trends Survey

The Confederation of British Industry (CBI) has a membership base of close to 0.2 million manufacturing firms (direct and indirect). On 23 July 2020, it released the results of its industrial trends survey (356 firms interviewed) for the period of May to July 2020.

The survey findings reveal the following:

  • Output volumes for May – July 2020 have fallen (by 59 per cent) as compared to April – June 2020 (a drop of 57 per cent)
  • Production output shrank in 14 out of 17 sectors surveyed
  • Manufacturing firms are hopeful of a rise in output in the next three-month period of August to October 2020 (15 per cent rise)
  • Firms surveyed are hopeful that the domestic orders could increase by 11 per cent for August to October 2020, while orders for foreign markets would drop by 18 per cent for the same period
  • Costs have shown a rise of 32 per cent for May to July 2020 as compared to April – June during the same year
  • Firms plan to cut on investments, but to a lower extent as compared to their April 2020 projections for the same
  • Consumer demand continues to remain lesser than pre-Covid levels, across sub-sectors
  • Government fiscal stimulus has provided a significant relief to manufacturing companies
  • Business sentiment hasn’t improved for May to July 2020 (registered a value of -1) as compared to April – June during the same year
  • Firms continue to face constraints with respect to their liquidity position

Unless the firms can see a sustained upturn in the consumer demand, they will not be confident of making large-scale future investment plans.

A few days back, the industry association had suggested to the government to extend the coronavirus job retention scheme (popularly known as the furlough scheme) till April 2021. The scheme was initiated in March 2020 to provide salary support for employees of ailing British businesses. It will come to an end on 31 October 2020. The CBI fears that more manufacturing firms would be laying off workers as the scheme expires, which will spell disaster for individuals and their families dependent on the salary income.

So finally, it does seem from the results of two different surveys that the worst is over, after coronavirus pandemic hit the UK’s economy. The flash UK PMI numbers released by IHS Markit/Cips for the month of July 2020 (for services and manufacturing sectors) show an improvement over the previous month of June. It indicates an improvement in the business conditions as perceived by the purchase managers of the firms surveyed. Similarly, the latest CBI industrial trends survey predicts the domestic orders to rise over the next quarter period (August to October 2020). However, both the surveys reveal that costs have risen with manufacturing and services firms continuing to adhere to health safety measures at their workplaces. They are also laying off workers to contain their wage bills, which is disquieting. Further, additional government support might be required in the next few months to push growth to pre-corona levels.  

 

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