Business activity has plunged to a record low in the UK, according a closely watched survey that suggests the coronavirus crisis will result in a “very deep recession”, economists have warned.
The IHS Markit flash UK purchasing managers’ composite index — an average across the manufacturing and services sectors — fell to 37.1 in March, the lowest level recorded since the survey began in July 1996, and a sharp drop from 53 in February. Any reading below 50 indicates a majority of businesses recorded a contraction in activity.
Services, which account for about 80 per cent of the UK economy, crashed to 35.7, sharply down from 53.2 in February.
The survey also signalled that employment had fallen across the manufacturing and services sectors at a scale not seen since July 2009. Business expectations for the year ahead dropped to the lowest recorded by a wide margin.
“The Covid-19 outbreak has already dealt the UK economy an initial blow even greater than that seen at the height of the global financial crisis,” said Chris Williamson, chief business economist at IHS Markit. The collapse in demand was driven by an increasing number of households and businesses closing their doors, he added.
“A recession of a scale we have not seen in modern history is looking increasingly likely,” Mr Williamson said.
The UK data came on the same day as a similar survey across the eurozone also recorded a record low in activity. The IHS Markit flash composite purchasing managers’ index for the eurozone plunged to 31.4 in March from 51.6 in the previous month — the lowest reading since the series began in the late 1990s.
The UK figures — based on about 85 per cent of the usual monthly survey — were compiled between March 12 and March 20, before the UK government’s decision to order pubs, restaurants and other leisure businesses to close by midnight on March 20 and well before Monday’s announcement of the closure of all non-essential shops.
So the deterioration that is visible in the March data could be “dwarfed by what we will see in the second quarter as further virus containment measures take their toll and the downturn escalates”, Mr Williamson said.
The initial impact of emergency public health measures, such as increased working from home and the call to adopt social distancing, were reflected in a sharp deterioration in customer-facing services activities, in transport and travel as well as the vast business-to-business services category.
Manufacturing activity deteriorated at a slower pace than services: its index dropped to 48 in March, from 51.7 in the previous month. The milder contraction partially reflects increased output of food and drinks as well as plastics, driven by household stockpiling of food and a surge in demand for pharmaceutical products.
Survey-based measures of economic activity can prove less accurate at times of high uncertainty, but economists warned that this month’s PMIs may underestimate the blow to the economy as they only capture the proportion of businesses affected, not how poorly they are doing.
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Samuel Tombs, chief UK economist at Pantheon Macroeconomics, a consultancy, said the “colossal” drop in the composite PMI was “more than three times bigger than its previous record decline [and] signals clearly that the economy is hurtling towards a deep recession”.
“The fact many firms have had to cease trading altogether suggests things could be even worse than the survey suggests,” said Andrew Wishart, UK economist at Capital Economics, a consultancy. “That’s why we are forecasting a 15 per cent fall in GDP in the second quarter, a larger fall in output than in the financial crisis or the Great Depression.”
Despite a large package of measures from the Bank of England and the government’s efforts to support for the economy, the size and length of the economic hit will be largely “determined by the longevity of the containment measures, how quickly they may be unwound, and whether some aspects become more permanent to limit a second outbreak later in the year”, said James Smith, an economist at ING.
