UK Private Sector Logs Sharp Contraction In May

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UK private sector output remained on a steep downward trajectory in May as lockdown to curb the spread of coronavirus, or Covid-19, weighed on almost all business activity, the flash survey results published by IHS Markit revealed on Thursday.

The flash IHS Markit/Chartered Institute of Procurement & Supply composite output index rose to 28.9 in May from 13.8 in April. The score was also above the expected 25.7.

Nonetheless, the latest reading signaled a far steeper pace of contraction than at the worst point of the global financial crisis.

Chris Williamson, chief business economist at IHS Markit, said GDP is likely to fall by almost 12 percent in 2020.

While the quarterly rate of decline looks likely to peak at around 20 percent in the second quarter, the recovery will be measured in years not months, Williamson noted.

The nature of the PMIs makes them tricky to interpret, but the rise in the composite PMI in May probably shows that April was the low point for activity, and that the slight easing in the lockdown on May 13 has led to some businesses reopening, Andrew Wishart, an economist at Capital Economics, said.

The services Purchasing Managers' Index came in at 27.8 in May, up from 13.4 in April and above economists' forecast of 25.0.

Similarly, the manufacturing PMI advanced to 40.6 in May from 32.6 in the previous month. This was also well above economists' expectations of 36.0.

The survey showed that lower volumes of business activity were almost exclusively linked to business shutdowns, cancellations of customer orders and a general slump in demand amid the coronavirus pandemic.

The survey showed rapid declines in new work and employment across the private sector in May due to severe lack of new business to replace completed contracts.

Due to discounting strategies, average prices charged across the service sector decreased in May. Input prices were lower as fuel prices and payroll expenses decreased from April.

Manufacturers bucked the overall trend, with respondents noting that rising freight costs, the need to source alternative suppliers and exchange rate depreciation had all pushed up purchasing prices.

Meanwhile, overall business expectations for the next 12 months continued to improve from the series record low seen in March.

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