The UK Private Sector is Back

The CIPS Flash UK Composite PMI for June shows an improved UK private sector, with the manufacturing and composite output reaching a four-month high. Moreover, the services business activity advanced as well, rising from 29 (May final figure) to 47 in June. 

Resilient Manufacturing Sector

Besides the overall improvement and pick-up in activity, the manufacturing sector took markets by surprise. Providing hopes of a quicker than expected turnaround as the UK economy reopens.

Confidence for the year ahead registered a rebound as business expectations improved. However, customer spending continues to lag and represents a drag in overall business activity.

Considering that the United Kingdom’s economy will further ease the lockdown from the 4th of July, yesterday’s data suggests a return to growth in the third quarter. Nevertheless, the fear remains that the recent bounce in the last is only a short-term effect as businesses return to work and that the longer-term recovery remains full of uncertainty.

IHS Markit data also tempers the enthusiasm expressed by the Bank of England (BOE) in regard to the expected growth in 2021. While BOE sees a sharp recovery, with the GDP to increase by 15% next year, Markit has a more cautious forecast, of just 4.9% in 2021, after a contraction of 11% in 2020.

For a service-based economy, the advance in the manufacturing output is best if accompanied by a services sector that expands too. While the services sector did outperform the previous month’s release, it is still shy of reaching the 50 level.

Nevertheless, the backbone of the UK services sector (i.e., Financial Intermediaries) was the best performing area of activity in June, leading to the assumption that further recovery in the sector comes sooner, rather than later.

Moving forward, what is worrisome is the employment component of both the manufacturing and services sectors. Businesses reported a further sharp drop in staffing numbers, particularly in the services sector.

All in all, there is more momentum in the private sector that indicates further upside possible in the third quarter. Depending on the success of the reopening (i.e., infection rate should not increase), the UK economy is poised to recover further.

However, without a stronger recovery in the services sector, the GDP will have a hard time growing, despite the manufacturing sector outperforming. The focus shifts to 2021, as 2020 looks like a write-off from an economic growth perspective.

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