Coronavirus lockdown tips UK economy into biggest slump on record

The UK’s manufacturing and services industries suffered the biggest slump on record this month, according to figures released on Thursday, as a Bank of England policymaker warned Britain’s economy was on course to suffer the deepest recession in several hundred years.

Gertjan Vlieghe, a member of the BoE’s interest-rate setting committee, said the UK was heading for a squeeze on incomes that was unprecedented in its speed and severity.

In a health check of the UK economy ahead of the monetary policy committee’s next meeting in May, he said: “Based on the early indicators, and based on the experience in other countries that were hit somewhat earlier than the UK, it seems that we are experiencing an economic contraction that is faster and deeper than anything we have seen in the past century, or possibly several centuries.”

Britain is expected to enter a recession in the first half of the year after large parts of the economy were forced to shut and workers stay at home as part of efforts to tackle the Covid-19 outbreak.

Data firm IHS Markit said its UK composite purchasing managers index (PMI), which tracks activity across the services and manufacturing sectors, slumped to just 12.9 for April, down from 36 in March and a record since the survey began in the 90s. This was far below economists’ forecasts and well short of the 38.1 reading recorded in the depths of the 2008 financial crisis. A PMI figure above 50 indicates an expansion of business activity.

Amid warnings that tackling the pandemic could wreck developed and developing world economies for several years, IHS Markit said the dive in activity in the UK and the eurozone was the worst since it started surveying businesses more than two decades ago.

Manufacturing and services companies reported a collapse in business, with the manufacturing PMI falling from 43.9 in March to 16.6 in April and the services PMI tumbling from 34.5 in March to 12.3 in April. The services sector accounts for about three-quarters of the UK’s business activity.

IHS Markit said 80% of the UK service companies it surveyed reported a drop in activity this month, as did 75% of manufacturers.

This was “overwhelmingly attributed to the Covid-19 pandemic”, the data provider said.

Many firms also reported record declines in new orders and backlogs of work and employment. Half of those surveyed said they had cut their workforce this month, with many saying they had furloughed staff.

A survey of manufacturers by the business lobby group the CBI documented the same slide in business activity over the last quarter coupled an outlook with the fastest reduction in jobs since 1980 over the next quarter.

The CBI said nearly half of businesses surveyed were expecting output to be limited by shortages of materials or components – the highest proportion since 1975.

The eurozone also suffered the steepest fall in business activity and employment ever recorded, ahead of what is expected to be the deepest global recession in peacetime. The eurozone-wide composite PMI hit an all-time low of 13.5 in April, down from a prior record low of 29.7 in March, reflecting the wholesale shutdown of Europe’s economy this month.

Chris Williamson, the chief business economist at IHS Markit, said that based on responses from business, the UK economy was likely to contract by 7% this year while the eurozone economy could fall by 7.5%.

He said: “The level of business closures and social distancing measures have caused business activity to collapse at a rate vastly exceeding that seen even during the global financial crisis, confirming fears that GDP will slump to a degree previously thought unimaginable in the second quarter due to measures taken to contain the spread of the virus.”

For the UK, he said the situation could be even worse as elements of business activity excluded from the survey fall at a faster rate.

“The actual decline in GDP could be even greater, in part because the PMI excludes the vast majority of the self-employed and the retail sector, which have been especially hard-hit by the Covid-19 containment measures.”

He said there was “one ray of light”, which came from an improvement in business optimism about the year ahead, compared with the all-time low recorded in March.

“Sentiment about the coming year nevertheless remained the second-lowest ever recorded to underscore how few businesses are anticipating a swift recovery,” he said.