Coronavirus: Biggest recession in modern history 'increasingly likely'

Tuesday 24th March 2020 18:15 GMT

At least as bad as the global financial crisis - and possibly worse.

That is the conclusion from some closely watched survey data covering the UK and the eurozone published today.

The purchasing managers' index (PMI) surveys, compiled by the financial intelligence and data provider IHS Markit in partnership with the Chartered Institute of Procurement & Supply, provide a monthly snapshot of economic activity.

They are designed to give an insight into business conditions across the economy and are compiled from the results of questionnaires sent to business executives about changes in, for example, their order book, their selling prices, their costs and the number of people they currently employ.

The responses are distilled into a reading which, if it is above 50, points to expansion in the economy and, if it is below 50, points to contraction in the economy.

IHS Markit also publish so-called 'flash' survey data, based on around three-quarters to four-fifths of monthly responses, which is what was published today.

The 'composite' number for the UK, bringing together answers for services and manufacturing, came in at 37.1 - down from 53.0 in February and an all-time low.

For the services sector, which makes up around four-fifths of the economy, the reading was just 35.7 - down from 53.2 in February and also an all-time low.

Chris Williamson, chief business economist at IHS Markit, said the March number was consistent with UK GDP falling at a quarterly rate of 1.5-2.0% - a decline sufficiently large to push the economy into a contraction for the entire first quarter of 2020.

He added: "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, such as business closures and potential lockdowns, a recession of a scale we have not seen in modern history is looking increasingly likely."

The figures for the eurozone were equally dispiriting.

The 'flash' composite data for the eurozone came in at 31.4, down from 51.6 in February, the worst reading since July 1998.

Within that, the 'flash' composite PMI reading for Germany was 37.2, the lowest since February 2009, while the reading for France was just 30.2, an all-time low.

Ominously, IHS Markit pointed out that, in the UK, the surveys making up the data were compiled between Thursday 12 March and last Friday, meaning that they were carried out before schools, pubs, cafes and restaurants shut up shop.

It also noted - again ominously - that the response rate for March had not been affected by shutdowns in place due to the COVID-19 outbreak.

The numbers have deepened pessimism about the outlook for the UK economy.

Allan Monks, UK economist at JP Morgan Securities, said the drop from February to March was reminiscent of the financial crisis.

He said it might point to a contraction in growth of 6% on a quarter-to-quarter basis but added that his sense was things could be worse because of the timing of the survey.

He added: "Given that social distancing restrictions were implemented progressively during that period, we should expect the final PMI for March to be revised down significantly further.

"For example, the closure of shops and restaurants began only on Saturday and the UK's lockdown came just yesterday.

"That suggests a [first quarter] GDP decline larger than implied by the March flash PMI and more in line with our current [first quarter] GDP forecast of a -10% annualised contraction.

"We hence see no reason to alter our forecast after this release.

"Moreover, we expect the April PMI to mark the low point in activity, and would expect to see the PMI to fall well below 30 in that month.

"We currently expect a 30% annualised decline in [second quarter] GDP."

Mr Monks said the drop in the employment reading in the survey pointed to a fall of between 1-2% in the number of people in work, on an annualised basis, which was half the pace seen in the financial crisis.

But he warned: "This contraction is likely to become more severe with time.

"In 2008-09 there was a four month lag between the trough in the output and employment readings.

"Government measures to support employee salaries will limit the employment decline but we expect the worst is yet to come."

If there is a bright spot in the UK survey data it is that the manufacturing sector, which had a reading of 48, appears to be holding up better than the services sector.

But it would be unwise to read too much into this because the chances are that activity in the food and drink sector, a major part of UK manufacturing, was flattered during the month as it rushed to meet demand created by households stockpiling groceries.

And things are likely to get worse.

The French reading is arguably lower than that of the UK because France was quicker than the UK to move to a more thorough public lockdown.

Those who do not follow these things closely will want to know how accurate the PMI survey data is.

The answer is - very.

The Bank for International Settlements, often described as 'the central banker's central bank', looked into this matter carefully last year and concluded: "Purchasing managers indices mirror changes in both real economic activity and financial conditions."

Indeed, on occasions, the PMIs have been a more reliable guide to what is going on in the economy than the official UK GDP data published by the Office for National Statistics.

A classic example of this came when, in April 2012, the ONS reported that the UK had slipped into recession after notching up two consecutive quarters of economic contraction in the final three months of 2011 and the first three months of 2012.

By contrast, the PMIs for the first three months of 2012 suggested that the economy had actually grown during the quarter, which subsequently turned out to be the case.

Later revisions by the ONS of its data confirmed the UK economy had not gone into recession after all.

The same applies to the PMIs for the eurozone.

During 2017, there were suggestions that the PMIs were painting too rosy a picture of eurozone GDP growth compared with the official statistics, only for Eurostat - the arm of the European Commission that compiles the data - to later revise its figures higher.

So these numbers deserve to be taken seriously. They are also seriously worrying.

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