UK economic activity slows sharply as Omicron hits - survey

UK economic activity slowed sharply in December, research showed on Thursday, hit by tighter pandemic restrictions and growing uncertainty over the spread of Omicron.

The flash IHS Markit CIPS UK composite output index for December plunged to a 10-month low, coming at 53.2 against 57.6 in November. It was also well below consensus expectations of 56.3.

Within that, the services business activity index fell to 53.2 from 58.5, also a 10-month low and well below consensus for 57.0. The UK manufacturing purchasing managers' index eased to 57.6 from 58.1.

Only the manufacturing output index edged higher, rising to 53.3 from 52.7 a month earlier.

IHS Markit said respondents had reported a "negative impact" on consumer demand following the introduction of tighter Covid-19 and travel restrictions. Manufacturing, meanwhile, continued to be constrained by both raw material and labour shortages.

Optimism for the year ahead also fell sharply, easing for the fourth consecutive month. Private sector expectations for the next 12 months are now the lowest since October 2020.

Chris Williamson, chief business economist at IHS Markit, said the economy was once again being hit by Covid-19.

"With infections set to rise further in the coming weeks, due to the spread of the Omicron variant, and more restrictions being introduced, the pace of economic growth looks likely to continue to weaken as we head into 2022," he said. "The bigger uncertainly will be on how rising infection rates both at home and abroad might cause further supply and labour shortages."

Duncan Brock, group director at the Chartered Institute of Procurement & Supply, said: "Grim news for the UK economy in December, as the positive gains over the last ten months were wiped out by yet another round of restrictions and curbs on consumers and businesses.

"The service sector took the brunch of these changes, with the softest expansion of new orders since the pandemic recovery started in Mach."

Gabriella Dickens, senior UK economist at Pantheon Macroeconomics, said: "The drop in the composite PMI provides the clearest sign yet that the Omicron variant has set back the economic recovery.

"It’s looking highly likely that GDP will drop in December and January, driven by declines in consumer services activity. We currently look for a 0.2% month-to-month drop in December, followed by a further 0.1% drop in January, but that assumes no additional restrictions are brought in. The decline will be much steeper if the government brings in new rules on social distancing or household mixing."

Martin Beck, chief economic advisor to the EY Item Club, said: "December’s flash survey was not all bad news. Manufacturers reported that supply chain bottlenecks had begun to stabilise, and businesses in the services sector reported weaker rises in costs and prices, reflecting a similar easing in imbalances between supply and demand.

"But whether this pattern continues remains to be seen, with the rise in Covid-19 cases in recent days increasing the risk of renewed labour shortages."

The survey was carried out between 6 and 14 December. The December data are flash readings, while November’s data are final.

A reading above 50.0 indicates growth while a reading below that signals contraction.