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UK economic activity stepping up in July, says EY

Jul 27
Tags: Ernst & Young LLP
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UK economic activity stepping up in July, says EY

The flash July purchasing managers’ survey suggests the economy is starting to change up a gear at the beginning of the third quarter. As lockdown restrictions start to ease, services activity has been improving substantially.

In fact, it is now at the strongest level it has been for five years, which is particularly important considering lagging services activity was the main cause of UK GDP being stifled. It only increased by 1.8 per cent month-on-month in May after contracting by a massive 20.8 per cent in March.

The services PMI was at 47.1 in June, but rose to 56.6 in July, putting it at a 60-month high. Rising above the 50.0 level is significant, as it indicates expanding activity. But it wasn’t just the services PMI that rose, as manufacturing PMI was up from 50.1 to 53.6 to create a 16-month high.

Howard Archer, chief economic advisor to the EY ITEM Club, said: “The July ‘flash’ purchasing managers’ survey for the UK manufacturing and services sectors indicated that activity picked up significantly, building on the improvement in June and May from April’s lows.”

For the first time since February, joint services and manufacturing output has been expanding, according to the survey. Not only that, but this expansion has been detected at the fastest rate since June 2015.

When it comes to the hard data, a modest return to expansion of the economy was seen in May. The composite output index rose to from just 13.8 in April to 30.0 in May, then 47.7 in June and 57.1 in July.

Domestic demand helped to drive a solid rebound in new orders throughout July, which was accompanied by a modest improvement in confidence. Conversely, an appreciable fall in services and manufacturing jobs was detected in July, with the rate accelerating from June.

Only time will tell whether the chancellor Rishi Sunak will choose to implement further steps to to support the labour market. If so, such an announcement is likely to be made in the Autumn Budget, which is due to be delivered in October.

The July purchasing managers’ survey offers hope of the economy returning to clear growth in the third quarter of the year, as lockdown restrictions ease further. The EY ITEM Club believes consumer spending contracted approximately 20 per cent quarter-on-quarter in the second quarter, contributing to a likely record quarter-on-quarter GDP contraction.

Mr Archer added: “The flash purchasing managers’ surveys point to the economy changing up a gear at the start of the third quarter as lockdown restrictions eased further.

“Markit said that survey respondents reported a gradual increase in business activity following the lockdown during the second quarter of 2020, helped by returns to work and a phased reopening of the wider UK economy. There were also some reports that clients had started to take a more long-term view when considering their spending plans.”

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