Economy Shows First Hints of Recovery as May UK PMIs Beat Expectations

- Data shows UK economy continues to contract
- But slivers of improvement seen
- Pace of recovery dependent on speed of lockdown easing
- Full recovery only likely in 2022 says ING economist

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A ray of sunlight peeped through the clouds hanging over the UK's battered economy when survey data showed that activity is picking up once more, leading to hopes that the worst of the lockdown-induced slump is now in the past.

The IHS Markit PMI survey for May showed the economy's two most important sectors had seen increased activity over the course of the month, with April likely to represent a low-point.

The Manufacturing PMI for May read at 40.6, which is better than a reading of 35.1 that markets were expecting, and a notable improvement on April's reading of 32.6.

The Services PMI - this is an important one as it accounts for over 80% of UK economic activity - read at 27.8, which is better than the 24.1 that markets were expecting and notably better than April's 13.4.

The composite PMI - which takes into account both sectors and gives a broader assessment of the economy's performance - read at 28.9, which is better than the 25 markets had been expecting and an improvement on April's reading of 13.8.

While there were clearly some positive to take away from the data it must be noted that what the numbers are telling us is that the economy continues its decline, as only a reading above 50 signals expansion.

"The UK PMIs registered noticeable improvements in May, rebounding from the drops to record lows set in April," says Nikesh Sawja, an economist at Lloyds Bank. "It should be noted, however, that these advances come after a month of record deteriorations in April as the UK went into full lockdown mode. That meant, some improvement in the headline balances was always likely."

According to IHS Markit, the rate of decline in overall business activity eased since April, but was much faster than at any other time since comparable data were first compiled in January 1998.

“The UK economy remains firmly locked in an unprecedented downturn, with business activity and employment continuing to slump at alarming rates in May. Although the pace of decline has eased since April’s record collapse, May saw the second largest monthly falls in output and jobs seen over the survey’s 22-year history, the rates of decline continuing to far exceed anything seen previously," says Chris Williamson, Chief Business Economist at IHS Markit.

Lower volumes of business activity were again almost exclusively linked to business shutdowns, cancellations of customer orders and a general slump in demand amid the coronavirus disease 2019
(COVID-19) pandemic.

So while the economy is still shrinking, the speed of that shrinkage has slowed and expectations for a further opening of restrictions in June should mean the outlook improves.

The index measuring business expectations for the next 12 months continued to improve from the series record low seen in March.

Survey respondents nonetheless widely commented on concerns that customer demand would take a long time to recover to levels seen before the public health crisis, with some service sector companies still deeply pessimistic about their near-term prospects.

Concerning the outlook, how the economy recovers from here depends on the speed and scale of the opening up of the economy.

June 01 is slated as being the most likely date for the further relaxing of lockdown measures, and we would expect details to come from the government a few days prior. The most recent data available shows covid-19 cases in the UK rose by 0.3% on Tuesday, the lowest yet in the country and well below the five-day average of 1.1%. Fatalities increased by 1.0%, in line with the average over the last five days.

Should UK infections and deaths continue to decline over coming days we would expect some movement on the government's behalf, paving the way for a further recovery in the economy.

Ultimately, the outlook for the UK economy remains highly contingent on the rate at which lockdown restrictions are eased back (both at home and abroad) and how quickly economic confidence recovers," says Sawja.

However, one economist says expectations for a rapid recovery in the economy look misplaced at the current juncture.

"Ultra-low PMI readings add to the evidence from Google's mobility data that activity in the UK economy is still down significantly on pre-virus levels. That points to a steep drop in second-quarter GDP, and hints at a slow recovery. A 'V-shape' rebound looks unlikely," says James Smith, Developed Markets Economist at ING Bank in London.

ING don't expect the UK economy to return to its pre-virus size until 2022 at the earliest.

"With social distancing likely to remain a feature of day-to-day life for some time, businesses will find operating more costly, and for some sectors, returning to more normal levels of demand is a fairly distant prospect," adds Smith.