UK manufacturing and services activity slump to eight-month low

Manufacturing and services activity slumped to an eight-month low in January as the combined impact of the Covid pandemic and higher barriers to trade that followed the Brexit deal took its toll on businesses.

Service industry companies were the hardest hit after the government imposed a third lockdown, which shut thousands of shops, gyms and theatres and restricted consumer spending.

The IHS Markit/CIPS composite flash survey of the manufacturing and services industries registered a drop in the purchasing managers index (PMI) to 40.6 from 50.4 in December with the services industry taking a bigger fall to 38.8. A figure below 50 indicates contraction and the drop exceeded economists’ forecasts by some margin.

Manufacturers recorded a “fractional rise” in production volumes at 52.9, IHS Markit said, after the rate of expansion declined sharply from December.

“Weaker export orders and short-term supply chain difficulties contributed to the slowdown in output growth, according to survey respondents,” it said.

Analysts at investment bank Investec said the PMI falls supported their forecast of the economy contracting by 2.5% in the first quarter of 2021. If official figures also show the economy contracted in the last quarter of 2020, then the UK will have suffered its first double-dip recession – two downturns in quick succession – since the 1970s. A recession is defined as two consecutive quarters of negative growth, which the UK economy experienced in the first and second quarters of last year.

Among the many difficulties faced by manufacturers was the largest increase in suppliers’ delivery times since the manufacturing PMI survey began almost 30 years ago. Slow traffic through UK ports has become a well documented feature of trade in recent months due to Covid restrictions, while businesses must also negotiate the extra red tape that followed December’s last-minute trade deal with Brussels.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the disruption at ports and the component shortages it will bring for manufacturers will mean that January’s GDP is about 12% below its pre-Covid peak, compared with shortfalls of 8.9% in November and 25% in April.

Survey respondents mostly said they were positive about their prospects over the longer term, attributing their expectations of a return to more normal levels of activity to a successful vaccine rollout during 2021.