UK Private Sector Contracts Most Since May

The UK private sector logged a renewed downturn in January as the third lockdown dampened the services economy and trimmed the manufacturing growth, flash survey results from IHS Markit and the Chartered Institute of Procurement & Supply showed Friday.

The flash composite output index fell sharply to an eight-month low of 40.6 in January from 50.4 in December.

Moreover, a reading below 50 indicates contraction. The score was forecast to rise to 50.7. Nonetheless, the speed of the downturn in the private sector output was softer than at the start of the pandemic.

“A steep slump in business activity in January puts the lockeddown UK economy on course to contract sharply in the first quarter of 2021, meaning a double-dip recession is on the cards,” Chris Williamson, chief business economist at IHS Markit, said.

The composite PMI points to a fall in GDP in January of about 5 percent month-on-month, Ruth Gregory, an economist at Capital Economics, said.

This suggests that the fall in GDP in January could be almost double the size of November’s 2.6 percent decline, the economist noted. Although that drop would be mild in the context of the 18.8 percent monthly decline seen during the first lockdown in April 2020.

The service economy was hard-hit by restrictions on trade and reduced consumer spending at the start of the year. At the same time, the manufacturing sector grew at the slowest pace since mid 2020.

The services Purchasing Managers’ Index plunged unexpectedly to 38.8 from 49.4 a month ago. The expected level was 49.9.

At 52.9, the manufacturing PMI dropped to a seven-month low from 57.5 in December and was much weaker than the expected reading of 57.3.

Lower levels of new orders, reduced employment and a swift depletion of pre-production inventories were the main factors weighing on the headline manufacturing PMI. There was a shortage of critical manufacturing inputs due to Brexit disruptions and a severe lack of international shipping availability.

At the composite level, volumes of new work decreased for the fourth consecutive month in January due to weak consumer spending.

Strong cost pressures persisted at the start of 2021, with the overall rate of inflation holding close to December’s 11-month peak.

Higher operating expenses, squeezed margins and lower demand also contributed to a moderate acceleration in the pace of private sector job shedding in January.

Driven by vaccine roll-out, business expectations for the next 12 months picked up slightly since December, reaching its highest since May 2014.

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