UK business activity in March dropped to its lowest level in more than 20 years, pointing to an economic recession of “unprecedented scale and depth” as many companies halted operations and people remain confined indoors to limit the spread of coronavirus.
The IHS Markit UK purchasing managers’ index for services, which account for 80 per cent of the economy, crashed to 34.5 in March, down from 53.2 in February, marking the lowest reading since records began in 1996.
The composite index, which includes services and manufacturing, dropped to 36, from 53 the previous month, also the lowest since it was first measured in 1998. Both readings were worse than the “flash”, or initial, estimates and are the steepest ever monthly falls. They also signal a faster deterioration than during the 2008 financial crisis.
Any reading below 50 indicates a majority of businesses reporting a contraction in activity.
The collapse in services activity was almost exclusively linked by survey respondents to business shutdowns and cancelled orders in response to the coronavirus pandemic.
The crash in the UK PMI index indicates that the measures taken to slow the spread of Covid-19 will “have pushed the economy into a recession of unprecedented scale and depth”, said Andrew Wishart, UK economist at Capital Economics.
Economists warned that the survey results might underestimate the impact of the crisis on economic output because the measure tracks how widespread the falling output is rather than its depth.
“The fact that many firms have had to cease trading altogether means the true picture is much worse,” said Mr Wishart, who forecasts a 15 per cent fall in gross domestic product in the second quarter of 2020, which would be a sharper contraction in output than in the financial crisis or the Great Depression that followed the 1929 crash.
The retail sector, which has halted much of its operations apart from essential shops, is not included in the survey, which also suggests the PMI reading might not be telling the full extent of the slowdown.
The survey shows that employers are cutting headcounts at the fastest pace since 2009, despite some companies saying they are placing staff on furlough to benefit from the government’s job retention scheme aimed at preventing widespread job losses.
“As the pandemic raged, some companies resorted to hasty redundancies and a freeze on job hires to stay afloat in the short term,” said Duncan Brock, group director at the Chartered Institute of Procurement & Supply.
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On Wednesday, the Department for Work and Pensions said nearly 1m people had applied for universal credit, its main benefits programme, since March 16, nearly 10 times the usual figure.
In the PMI survey, the drop in new orders in the services sector was also much sharper than the previous record seen in November 2008 and translated into excess business capacity building up. This was signalled by the largest decline in unfinished business in more than two decades of data collection.
While the pandemic is considered temporary, business expectations for the year ahead dropped to the lowest in more than 20 years of data collection.
The collapse in UK activity mirrors that across Europe where businesses in the services sector also reported the fastest deterioration in more than 20 years. The contraction was steeper in Italy, where a lockdown was first introduced, which could suggest UK activity falling further if the restrictions continue.
On Thursday, the Munich-based Ifo economics think-tank calculated that two months of partial business closure in the UK could cause losses up to 13 percentage points of GDP growth, with a single week’s extension resulting in 1.5 percentage points of additional contraction.
