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Economy reopening lifts UK private sector to 23-year high

·4-min read
The reading for the UK's services sector rose to the highest level since 2013. Photo: Dominic Lipinski/PA Images via Getty Images
The reading for the UK's services sector rose to the highest level since 2013. Photo: Dominic Lipinski/PA Images via Getty Images

The UK economy is bouncing back strongly from months of lockdown slump and the onslaught of Brexit, with key economic indicators surging as restrictions are eased. 

Britain's private sector grew at its fastest pace in over two decades in May as the reopening of the economy drove business confidence to a record high. 

IHS Markit/CIPS Flash UK Composite PMI showed on Friday that its measure of private sector growth hit the highest since the index began in 1998, with hotels, restaurants and other consumer-facing services posting the strongest demand. 

This lifted IHS Markit’s purchasing managers index (PMI) to 62 in May, from 60.7 in April this year. 

"The performance of private sector business is hugely encouraging even with the obstacles of Brexit and Covid still in place, and becoming more resilient at a rate of knots," said Duncan Brock, group director at CIPS. "Had supply chains been less squeezed and the weather more seasonal for hospitality particularly, progress would have been off the scales."

Chart: IHS Markit
Chart: IHS Markit

Service sector firms reported a jump in activity in May as vaccinations speed up and lockdown eases.

The reading for the UK's biggest sector — services, which has been hammered by the coronavirus crisis, rose to 61.8 from April’s 59.2, the highest rise since 2013. 

The equivalent measure for manufacturing reached 66.1 — the most since the survey began in 1992. This was up from 59.2 in April. 

Factory orders also rose at a record pace. But, UK firms also reported that their costs jumped at the fastest rate since August 2008, with manufacturers flagging high shipping costs and shortages of raw materials, while service providers noted increased staff salaries. 

Britain is "enjoying an unprecedented growth spurt as the economy reopens," according to Chris Williamson, chief business economist at IHS Markit. "The output and order book growth seen in May, and record level of business optimism, are consistent with GDP rising sharply in the second quarter and for strong momentum to be sustained through the rest of the year."

Williamson said a "direct consequence of demand running ahead of supply was a steep rise in prices, hinting strongly that consumer price inflation has much further to rise after lifting to 1.5% in April."

However, the inflationary spike may be "temporary as many of the price hikes have reflected surcharges on shipping and other shortage-related issues" emanating from COVID.  

"As these constraints ease, price pressures should abate, but there remains a great deal of uncertainty as to how long it will take for global business and trade to return to normal functioning, especially if new virus variants appear," he added. 

Chart: Yahoo Finance
Chart: Yahoo Finance

The data also supported other reports that saw Britain's labour market beat forecasts. 

Similarly, employment in the private sector also surged at the quickest pace since June 2014 as workers slowly returned to the office amid a swift turnaround in labour market conditions, according to IHS Markit. 

"A strong influx of new work from domestic and export customers signalled the end of a COVID-suppressed marketplace and job," Brock added.

The reopening and lockdown easing also buoyed European economies. 

Watch: What is inflation and why is it important?

Figures released on Friday showed that the Eurozone economy surged in May. New orders in the region rose at the fastest pace in nearly 15 years as firms struggle to meet demand. 

Data from IHS Markit showed strong rebound in private sector activity in the EU's two largest economies. Growth in France hit its fastest since July 2020, while in Germany it was the second-strongest performance since February 2018.

Read more: FTSE falls despite retail sales and consumer confidence rising in April

Meanwhile, separate figures from the Office for National Statistics (ONS) showed the volume of goods sold in shops and online soared 9.2% in April, beating analysts' expectations as non-essential retail reopened. 

Compared with April 2020, during the first national lockdown, sales were up 43%, according to the ONS. Sales were also 9.9% higher than the last month of trading before the pandemic hit.

Shoppers indulged in new clothes, including outerwear and knitwear, compared with previous shopping habits of wearing comfortable clothes and loungewear for indoors.

It came as a separate report showed consumer confidence jumped in May to levels last seen before the original lockdown in March 2020.

The GfK Consumer Confidence Index improved to -9 in May from -15 in April, the highest since March 2020. 

"The financial mood of the nation has bounced back to its pre-lockdown figure of minus 9 this month, meaning confidence has made up all the ground lost to COVID-19," said Joe Staton, client strategy director at GfK. 

GFK’s gauge of optimism about the economic outlook over the next 12 months jumped by 15 percentage points.

Watch: UK economy contracts in Q1, but rebounds in March

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