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Economy starts to reopen as collapse comes to an end

Tim Wallace
A man works to affix a sign advertising the planned July 4 re-opening of a bar in Soho - DANIEL LEAL-OLIVAS/AFP

A key economic survey bounced back sharply in June as swathes of the country reopened and companies geared up to restart.

The purchasing managers’ index (PMI) from data firm IHS Markit jumped from 29 in May to 47.1 in June for services, and from 30 to 47.7 in the private sector as a whole - with optimism about future growth picking up strongly.

Any score of below 50 indicates a contraction, so this shows the collapse at the height of the lockdown has now moved to a more even keel with the highest score since the onset of the pandemic. The score is calculated by surveying business leaders.

A quarter of services companies reported that their order books are growing once more, with the industry starting to return to something approaching normality.

It suggests the country could be on track for a rapid "V-shaped" recovery with few lasting scars from the pandemic, echoing remarks earlier this week by the Bank of England's chief economist Andy Haldane.

But travel and leisure companies remain in the doldrums, with much domestic reopening only due to happen this month and the future for holidaymakers and business travellers still uncertain.

Tim Moore, of IHS Markit, said: “The worst phase of the service sector downturn has passed as more businesses start to reopen and adapt their operations to meet social distancing requirements."

More than three-quarters of businesses suffered a fall in activity in April as the economy collapsed into its worst recession for centuries. In May, this proportion fell to just over half and it was down to one-third in June.

This is not the same as a strong return to growth and companies fear demand will not return – leading them to cut jobs, which in turn will undermine demand in the economy.

Mr Moore said: “Service providers widely commented on fears of a slow recovery in customer demand and an immediate need to reduce overheads."

“Moreover, survey respondents often noted the high cost of adapting operations during the Covid-19 pandemic, coupled with constrained business capacity and difficulties passing on rising expenses to clients.”

The improved PMI indicates Britain is in a similar position to Germany, which recorded a slightly lower composite index at 47 – its highest score in four months.

Similar numbers were reported across the eurozone, with Ireland at 44.3, Italy 47.6, Spain 49.7 and France managing a modest return to growth at 51.7.

Economists take this as a good start to a recovery, but note there is a long way to go to return the economy to its pre-pandemic size.

Claus Vistesen, of Pantheon Macroeconomics, said: “The rebound indicates that activity has continued to improve through the second quarter as economies reopened, but it doesn’t tell us anything about the level of activity, which is still a good deal lower than before the crisis.

“New orders remain weak, and firms are still shedding jobs, running down work backlogs and cutting selling prices. At the very least, we need to see a more significant rebound in new business inflow to change our view that the recovery is set to be slow, beyond the initial leap in activity as economies reopened.”

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China’s services industry recorded its biggest growth spurt in a decade, indicating that a rapid recovery could also be possible in the West.

Its headline business activity index jumped to 58.4 as the lockdown eased and demand picked up.

Wang Zhe, economist at Caixin Insight Group, said: “Employment remained the key problem. Multiple data showed that work resumption rates at manufacturing and service companies continued rising in June, but it still takes time for the economy to fully recover.

“Therefore, although businesses were optimistic about the economic outlook, they remained cautious about increasing hiring, with employment in both the manufacturing and services sectors shrinking.”