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Coronavirus: UK economic shock to be 'deeper than anything in living memory'

Edmund Heaphy
·Finance and news reporter
·3-min read
Skyline of the city of London and Tower Bridge taken from the Millenium Bridge at dawn during the coronavirus pandemic on the 24th April 2020 in London, United Kingdom.  (photo by Barry Lewis/InPictures via Getty Images)
The City of London at dawn during the coronavirus pandemic. (Barry Lewis/InPictures via Getty Images)

The UK private sector is experiencing its fastest downturn in decades, further outlining the extent to which the country’s economy is experiencing an economic shock without precedent in modern times.

The composite purchasing managers’ index reading from IHS Markit’s closely watched survey came in at 13.8 in April, the worst reading since the series began in 1998.

The shock from the coronavirus pandemic will be “far deeper and more widespread than anything seen in living memory,” according to Tim Moore, the economics director at IHS Markit.

A reading of 13.4 painted a bleak picture for the services sector, which saw record declines in new work, backlogs, and employment. Some 79% of respondents reported a drop in business activity.

READ MORE: UK car sales hit lowest level since 1946

The services sector is hugely important to the UK economy — it includes finance, law, retail, engineering, and consulting — and makes up about 45% of the country’s exports.

PMIs are an indicator of private sector activity and are given on a scale of 1 to 100. Anything above 50 signals growth, while anything below means contraction.

The drop in business activity was “overwhelmingly attributed” to business closures, shutdowns among clients, and declining sales due to a fall-off in non-essential spending, according to IHS Markit.

New business from abroad also slumped in April, with transport, tourism, and leisure firms citing cancellations of almost all overseas bookings.

Around half of respondents said there had been a decline in their payroll numbers in April, with many firms linking lower employment to use of the UK government’s job retention scheme.

IHS Markit also pointed to “severe cash flow constraints,” noting that such constraints could lead to additional job cuts if the scheme is not extended through the coming months.

“Those relying on travel, social gatherings, or face-to-face business continue to report severe cash flow concerns,” said Moore.

READ MORE: US government to borrow record $3tn in three months to tackle crisis

Though business optimism for the next 12 months picked up “very slightly” from March’s record low, firms noted that things were unlikely to return to normal in the immediate future, IHS Markit said.

Around one in seven survey respondents noted that business activity was unchanged compared to March, when many firms enacted business continuity plans and implemented work-from-home regimes.

A “small minority” of respondents saw growth in new business in April, which was mainly attributed to online consumer spending, public sector contract awards, and demand for remote working services.

“The services sector reached a stasis in April as the engine of business was put to sleep and the flow of new customers was cut off amidst public health concerns,” said Duncan Brock of the Chartered Institute of Procurement & Supply.

“The PMI graphs visibly show cataclysmically low levels of domestic and export new orders, along with outstanding business as companies simply shut up shop.”