Virus lockdown and Brexit bureaucracy hit UK economy - PMI

Business activity saw its sharpest drop in the UK since May, according to a closely-watched survey.

The preliminary IHS Markit/CIPS Flash UK composite purchasing managers' index (PMI) fell to a reading of 40.6 in January, down from 50.4 in December.

Anything below 50 signals a contraction and the flash survey covers around 75-80% of the total survey.

The survey blamed the latest shutdown brought in by the government to limit the spread of the coronavirus and the post-Brexit shift to a more bureaucratic trading arrangement with the European Union.

Chris Williamson, chief business economist at IHS Markit, said: "Services have once again been especially hard hit, but manufacturing has seen growth almost stall, blamed on a cocktail of COVID-19 and Brexit, which has led to increasingly widespread supply delays, rising costs and falling exports."

The pace of job losses accelerated in January, despite an easing in December.

It comes as the number of UK deaths from COVID-19 nears 100,000 - the highest in Europe and the fifth-highest in the world after the US, Brazil, India and Mexico.

But, with the vaccine programme continuing to expand, there are hopes for an economic rebound later this year, with the number of companies feeling optimistic about the year ahead hitting a 6.5-year high.

The PMI for the services industry, which accounts for 80% of Britain's economy, fell to 38.8 in January from 49.4 in December, its lowest level since May and the third month of contraction.

The manufacturing PMI fell to 52.9 in January from 57.5 in December.

Ruth Gregory, senior UK economist at Capital Economics, said the drop in the composite flash PMI was "far larger than the consensus forecast".

On a more positive note, the manufacturing PMI "only" dropped from 57.5 in December to 52.9, and a third of that decline was due to the "stocks of purchases" balance falling to a more normal level.

"Admittedly, the PMI received a boost due to the lengthening of suppliers' delivery times, caused by Brexit supply chain disruptions and COVID-19 border closures. Longer delivery times are usually associated with strong demand and raise the headline index.

"But the output balance remained above the 50 no-change mark.

"Overall, the composite PMI points to a fall in GDP in January of about 5% month-on-month. That would be much bigger than November's 2.6% month-on-month fall in GDP, but at least it would be mild in the context of the 18.8% m/m decline seen during the first lockdown in April 2020."