UK heads for deep recession as business activity slumps

The coronavirus caused a record slump in UK business activity even before the government imposed extraordinary measures to curb the spread of the disease, a closely watched survey showed.

The IHS Markit/CIPS flash purchasing managers index (PMI) plunged to 37.1 in March from 53.0 in February. The result was the lowest recorded, exceeding the fall at the peak of the financial crisis, and was far below expectations for a score of 45.0.

Economists said with further restrictions now imposed on business activity the results indicated Britain was heading for the deepest recession in modern history.

The slump was led by a rapid decline in business for Britain's services sector, which makes up about 80% of the economy. Services activity dropped to 35.7 from 53.2 and was also far worse than economists expected.

The survey was completed on 20 March before the government ordered the closure of pubs, restaurants and other service businesses. On Monday the government imposed still stricter measures by shutting all but essential shops and telling people to stay in their homes.

As manufacturing production also dropped sharply to 44.3 from 52.2, business expectations for the year ahead fell at the fastest pace since December 2008 and employment declined across manufacturing and services at a rate not seen since the depths of the 2009 recession.

Chris Williamson, chief business economist at IHS Markit, said: “The surveys highlight how the Covid-19 outbreak has already dealt the UK economy an initial blow even greater than that seen at the height of the global financial crisis. With additional measures to contain the spread of the virus set to further paralyse large parts of the economy in coming months … a recession of a scale we have not seen in modern history is looking increasingly likely."

The survey was mainly conducted before the government announced £350bn of loans and grants to prop up businesses and a commitment to pay up to £2,500 a month to people unable to work because of the crisis. But it does not include retailers, most of which have since been ordered to close, and the impact of school closures and the government's order for people to stay at home.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, estimated the fall in second-quarter output would be at least twice as big as signalled by the PMI.

"The colossal drop in the composite PMI signals clearly that the economy is hurtling towards a deep recession," Tombs said. He said the response by the government and the Bank of England, which has cut interest rates to a record low, give hope there will not be massive medium-term damage to the economy.