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Economy plunges again in May as lockdown blights business fortunes

Tim Wallace
Closed pub - Matt Dunham /AP

Business activity plunged again this month as the lockdown continued to pound the British economy.

Almost every industry suffered further in May as the closely watched purchasing managers’ index (PMI) survey of companies indicated that the UK is in the grip of a severe recession - sparking fears that GDP will shrink as much as 12pc this year.

The initial PMI reading for May came in at 28.9, where any score below 50 signals a contraction. This is up from 13.8 in April, suggesting a recovery of sorts may be underway, but is still far worse than anything seen in the financial crisis.

The only hope for a sustained bounce lies in the virus being defeated, allowing the economy to reopen and 8 million furloughed workers to go back to their jobs.

Chris Williamson, chief business economist at IHS Markit, said: “Travel and tourism firms, hotels, restaurants and producers of consumer goods such as clothing were again the hardest hit, reflecting virus containment measures, but this remains a shockingly broad-based downturn with very few companies left unscathed.

“An improvement in business confidence about the year ahead for a second successive month is welcome news, and the easing of restrictions in coming months should help boost activity in some sectors as we head into the summer.

“However, the UK looks set to see a frustratingly slow recovery, given the likely slower pace of opening up the economy relative to other countries which have seen fewer Covid-19 cases.”

He predicts a 20pc fall in GDP in the second quarter of the year with a fall of almost 12pc for 2020 overall.

There are some signs of life in industries such as construction as companies cautiously get back to work with new social distancing measures in place.

Firms in the supply chain reported rising demand for manufacturing and building components. Healthcare industries also reported growth, with medical supplies in high demand.

But the scale of the drop in manufacturing suffered so far is bigger than anything previously seen. A survey by the Confederation of British Industry recorded the sector's steepest fall in the three months to May since its records began in 1975.

More than eight in 10 manufacturers have suffered a drop in domestic demand and more than two-thirds have been hit by a drop in exports, the business group found.

It is not only the reopening of industries that is needed to get the economy back on track – demand is also required. Companies reported low levels of interest from customers, particularly for expensive items such as new cars. 

Experts believe the economy will take about two years to get back to its pre-coronavirus size.

Jacob Nell of Morgan Stanley said the Bank of England is likely to ramp up its money-printing programme to boost the recovery and warned that businesses are likely to remain cautious due to surging unemployment and fears over a possible second wave of Covid-19.

Meanwhile, more signs of a gradual reopening of the economy emerged in the Office for National Statistics’ Covid-19 economic indicators. 

According to its latest survey of more than 6,000 companies between April 20 and May 3, 19pc of accommodation and food services firms such as hotels, restaurants and pubs has resumed trading

Some 15pc of builders and 12pc of manufacturers also reopened a week before the official guidance from Prime Minister Boris Johnson urging them back to work.

There is a similar pattern in the eurozone, where the flash PMI is up from 13.6 in April to the still ultra-low 30.5 in May.

Bert Colijn, an economist at ING, said: “The increase is in line with the cautious easing of lockdowns but also buries any hopes of a v-shaped recovery."

“The reopening of businesses has indeed caused more companies to record output growth again, but the majority of businesses are still experiencing contraction or no change from a very low base.”