UK and eurozone business activity falls sharply in November as lockdown effects take hold

Services sector hardest hit as hotels, bars and restaurants closed during second Covid wave

People walk past a Cineworld in Leicester's Square. Services have been hit hard across the UK and eurozone, as consumer-facing service providers report the steepest downturns. Reuters

The UK and eurozone are both on track for a double-dip recession after business activity contracted sharply in November, as countries imposed stricter movement restrictions to contain the spread of Covid-19.

IHS Markit’s flash composite Purchasing Managers' Index (PMI), an indicator of the economic health of the private sector, fell to a six-month low of 47.4 in November in the UK, from 52.1 in October. It is the first time the index has fallen below 50 – the level separating growth from contraction – since June.

In the eurozone, the contraction was more dramatic, falling to 45.1 in November from October's 50, putting the bloc's economy on track for its first double-dip recession in nearly a decade.

“The eurozone economy has plunged back into a severe decline in November amid renewed efforts to quash the rising tide of Covid-19 infections,” said Chris Williamson, chief business economist at IHS Markit.

“The service sector has once again been the hardest hit, especially consumer-facing and hospitality businesses, though weakened demand has also taken a toll on manufacturing.”

Meanwhile, services PMI in Britain fell to 45.8 from 51.4 in October, after Prime Minister Boris Johnson ordered a four-week lockdown for England and other parts of the country also had stronger restrictions imposed.

"A double-dip is indicated by the November survey data, with lockdown measures once again causing business activity to collapse across large swathes of the economy. As expected, hospitality businesses have been the hardest hit, with hotels, bars, restaurants and other consumer-facing service providers reporting the steepest downturns," said Mr Williamson.

Manufacturing, however, was largely unaffected by the latest lockdown because construction sites were allowed to continue operation with PMI rising to 55.2, the joint-highest level since 2018.

A possible trade shock at the end of next month, when Britain's post-Brexit transition deal with the European Union expires, prompted clients of British factories to increase their orders to build up stocks.

That in turn led to longer supplier delivery times because of severe delays at British ports, with Felixstowe, one the country's largest ports, suffering severe congestion.

“The relatively small fall in November’s flash composite PMI suggests that the hit to GDP (gross domestic product) from the second lockdown will be much smaller than the first and that our expectation of an 8 per cent month-on-month drop in GDP in November may be too pessimistic,” said Thomas Pugh, UK economist at Capital Economics.

Rishi Sunak, Britain's Finance Minister, has promised that the pandemic will not lead to austerity, as he is set to unveil "quite a significant" increase in public-service funding in a one-year spending plan on Wednesday.

Looking ahead, the IHS Markit survey found managers were at their most optimistic since March 2015, boosted by news of progress in the development of coronavirus vaccines.

However, job losses across the private sector accelerated, although some of the reductions were due to companies taking advantage of the government's extension to the jobs protection scheme.

“A surge in unemployment once the furlough scheme ends, possibly from 4.8 per cent in September to as high as 9 per cent, could prolong the crisis,” said Mr Pugh.

“And given that it looks like restrictions are going to remain tight in many areas of the country once this second Covid-19 lockdown ends on December 2, there may be a much slower bounce back in activity than after the first lockdown."

In the eurozone, the lockdown also saw the PMI covering the services industry fall to 41.3 from 46.9, its weakest reading since the height of the first Covid wave. Germany's services PMI fell to 46.2 in November from 49.5 the previous month, while the same measure in France fell to 38.0 from 46.5 in October.

The data adds to the likelihood that the euro area will see GDP contract again in the fourth quarter, according to Mr Williamson, who expects a 7.4 per cent contraction this year, followed by a 3.7 per cent expansion in 2021.

With demand across the bloc drying up despite price cuts and backlogs of work being run down, several firms reduced headcounts for the ninth consecutive month with the services employment index falling to 48.1 from 48.5.

However, Eurozone manufacturing fared better thanks to many factories still operating, its flash PMI holding well above the break-even mark at 53.6 in November, but still below October's 54.8.

“The resilience of manufacturing is a key factor supporting the economy through the winter. In particular, activity in German manufacturing remained strong as fewer direct restrictions… and strong international demand supported the sector,” said Rosie Colthorpe, European economist at Oxford Economics.

The overall falls in PMI were also far less severe than during the spring lockdown, “supporting our view that the hit to activity will be much smaller", she said.

"We expect the eurozone economy to contract by 2.6 per cent quarter-on-quarter in the fourth quarter compared to 15 per cent in H1."

Hopes for a vaccine and expectations for more stimulus from the European Central Bank next month, mean that optimism for the year ahead improved with the composite future output index jumping to 60.1 from 56.5, its highest since February before Covid-19 hit Europe.