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UK economy shrinking but not as fast as during first lockdown

The first indication of the impact the second national lockdown is having on the UK economy has been revealed in a new survey of purchasing managers.

Figures for November compiled by IHS Markit show that UK private sector output has fallen at its fastest rate since the spring.

The Flash UK Composite Output Index reading for November was 47.4 – a six-month low and down from 52.1 in October.

Crucially, the index has fallen below the 50.0 mark that separates growth from contraction.

However, it looks as if the rate of contraction is nowhere near as devastating as it was during the first lockdown, when the survey readings for April and May were a miserly 13.8 and 28.9 respectively.

Prior to the pandemic, the survey record low was 38.1 recorded in November 2008.

Today’s (November 23) data also shows a sharp divergence between manufacturing and services, where the former actually improved upon its October performance and the latter fell to a six-month low.

The UK Manufacturing Output Index for November rose to 56.3, up from 55.8 in October, whereas the UK Services Business Activity Index fell to 45.8, down from 51.4.

The services index is ultimately what dragged the composite output index into contraction territory because the services sector makes up such a large part of the UK economy.

Manufacturing growth over the month was linked to rising demand from export markets and companies looking to build up inventory. Conversely, the downturn in services was due to mass closures among leisure and hospitality venues in line with the national lockdown.

The underperformance of the services sector relative to manufacturing was the widest in almost 25 years of data collection.

Looking ahead, survey respondents remained optimistic that business activity will increase during the next 12 months.

In fact, optimism was at its strongest in November since March 2015, with many companies hopeful that positive views on the vaccine front could bring an end to the coronavirus pandemic and social distancing restrictions.

Overall, the November survey data indicates a double-dip recession in Q4 2020.

Hospitality businesses have been hardest hit, with hotels, bars, restaurants and other consumer facing firms reporting the steepest downturns.

Chris Williamson, chief business economist at IHS Markit, said: “Some comfort comes from the data suggesting that the impact of the lockdown has not been as severe as in the spring, and manufacturing has also received a significant boost from inventory building and a surge in exports ahead of the UK’s departure from the EU at the end of the year, providing a fillip for many companies.

“However, while the lockdown will be temporary, so too will this pre-Brexit boost.

“The health of the economy in the new year therefore remains highly uncertain, but it is very encouraging to see the survey’s gauge of business optimism surge higher in November.

“Improved prospects for the year ahead are thanks mainly to the news of successful vaccine trials, which at last provides a light at the end of the tunnel for many businesses.”