UK economic activity has dropped to the lowest level since May as a result of the latest coronavirus lockdown, post-Brexit red tape and broader port disruption, according to the first comprehensive business survey of the year.
The flash IHS Markit/Cips purchasing managers’ index for services, a measure of economic health, fell to 38.8 in January compared with 49.4 in December.
The estimate, based on data collected from January 12-20, was the lowest reading in eight months and well below the 45 level forecast by economists polled by Reuters. It is also the third consecutive reading below 50, which indicates a majority of businesses reporting a contraction in activity.
The downturn in services, which account for about 80 per cent of the economy, drove down the composite index, an average of services and manufacturing, to 40.6 in January from 50.4 in the previous month.
As with services, the reading was well below analysts’ expectations and lower than in November when official data showed that the economy contracted 2.6 per cent compared with the previous month.
Chris Williamson, chief business economist at IHS Markit, said: “A steep slump in business activity in January puts the lockdown UK economy on course to contract sharply in the first quarter of 2021, meaning a double-dip recession is on the cards.”
However, the survey also confirmed some resilience in the economy compared with the spring lockdown, when the composite PMI dropped to 13.8, as businesses adapt to social distancing measures.
The manufacturing sector performed better than services in January and factories’ output rose marginally. However, the rate of expansion eased sharply compared with December as manufacturers struggled with supply chain difficulties and port disruption.
Duncan Brock, group director at the Chartered institute of Procurement & Supply (Cips), said: “Suppliers put in some of the slowest delivery times in the last 30 years as port delays and shipping shortages prevented the distribution of much-needed goods, compounded by mounting price rises as supply chains were overwhelmed.”
Samuel Tombs, chief UK economist at consultancy Pantheon Macroeconomics, said the January PMI figures “provide more evidence that the current lockdown has damaged the economy more than November’s light-touch variety”.
He also warned that since the PMI excludes activity in the retail and public sectors, the closure of schools and the cancellation of non-Covid-19 work by hospitals “will additionally depress GDP”.
Manufacturers reported shortages of critical inputs as a factor holding back growth in January and more than half of those surveyed reported a deterioration in supplier performance. Manufacturers linked the shortages to both Brexit disruption and a severe lack of international shipping availability.
Businesses also reported rising cost pressures, driven by the steepest increase in manufacturing sector input prices for nearly four years. Higher operating expenses, squeezed margins and lower demand also contributed to accelerated job cuts in January.
January’s flash composite PMI index for the UK was lower than the 47.5 for the eurozone, reflecting the tighter Covid-19 restrictions because of a more contagious variant of the virus and Brexit-related disruptions.
Despite the renewed downturn, companies in both sectors remained upbeat, with business expectations rising to the highest level since May 2014 on the expectation of a successful coronavirus vaccine rollout during 2021
Flash estimates are published one week before the final results and are based on about 85 per cent of the typical responses.