UK business activity grows in August but job cuts gather pace

Business activity in the UK grew more than expected in August as the recovery from the coronavirus slump continued, but job cuts gathered pace, according to flash figures released on Friday.

IHS Markit’s preliminary composite output index - which measures activity in the services and manufacturing sectors - rose to 60.3 from 57.0 in July, beating expectations for a reading of 57.1 and reaching the highest level in nearly seven years.

A reading above 50.0 indicates contraction, while a reading above signals expansion.

The purchasing managers’ index for the services sector increased to a six-year high of 60.1 in August from 56.5 in July. Analysts had expected a reading of 57.0. Meanwhile, the manufacturing PMI printed at 55.3 in August compared to 53.3 the month before, hitting a two-and-a-half year high and beating expectations of 53.8.

On the downside, however, the latest data also showed the fastest pace of decline in employment numbers since May. Lower payroll numbers were attributed mainly to redundancy programmes in response to depleted volumes of work and the need to reduce overheads before the government’s job retention scheme winds down.

Tim Moore, economics director at IHS Markit, said: "There were encouraging signs that customer-facing service providers have started to catch up with the rebound seen earlier this summer across the wider economy, with easing lockdown measures, staycations and the Eat Out to Help Out scheme all reported as factors supporting growth in August.

"Positive signals for the recovery of course need to be considered in the context of UK GDP shrinking by around one fifth during the second quarter of the year. Survey respondents often noted that it could take more than a year to return output to pre-pandemic levels and there were widespread concerns that the honeymoon period for growth may begin to fade through the autumn months."

Ruth Gregory, senior UK economist at Capital Economics, said that while the rise in the composite PMI provides further evidence the recovery continued at a strong pace in the third quarter, rising unemployment should put a brake on the recovery later this year.

She said the jump in the composite PMI may have more to do with the later re-opening of the UK economy rather than a quicker recovery overall. "Indeed, based on the experience in other countries, August’s UK composite PMI may prove to be the peak.

"What’s more, at 38.7 in August the composite employment index remains well below 50.0, suggesting the recovery in output hasn’t stopped firms from letting workers go. That is a key reason why we think that an impressive initial rebound of about +17% q/q in GDP in Q2, will give way to a much slower recovery in the second half of this year."