How has lockdown affected UK markets and purchasing?

Today’s PMI data release clearly shows that the UK economy is feeling the impact of the latest wave of lockdowns, but this is being added to by the disruption caused by Brexit. However, we should be mindful that although services in the UK and Europe are feeling the pinch, things aren’t as bad as they were last spring, and firms remain optimistic on the outlook.

Whilst last week’s GDP figures for November were slightly better than expected, the PMI figures highlight the challenges ahead. Moreover, the idea of the UK heading into a double dip recession is not totally unfounded. Ultimately, we still believe that once lockdown restrictions start to ease, there will be a strong rebound in economic growth, fuelled in part by pent-up demand and higher than usual rates of savings.

Recent economic data is unlikely to push the BoE in one direction or another when they gather for their meeting in February, thus we expect no change to the stance of monetary policy. We remain constructive on the outlook for the pound against the backdrop of a weakening US dollar, looking for the cross to trade above 1.40 later this year.

The purchasing managers’ indices suggest that lockdowns are taking a toll in the UK and the euro area alike. While manufacturing looks more resilient on both economies, the UK is seeing private sector output falling at the fastest pace since last spring, while services activity is shrinking in the euro area too.

The economic cycle remains weak for now. This tough environment looks set to extend for a while longer, given more widespread lockdowns. But vaccination has started, allowing the gradual reopening of many activities in some form from this spring, when we expect vaccine distribution to gather pace. This is the key difference between this year and the last one.

Somewhat encouragingly, the current downturn looks far less severe than that seen during the first lockdown – perhaps as economies have adapted to some degree. What’s more, confidence has increased enough that the outlook looks set to improve later this year, when reopening takes place.

The more cyclical sectors and/or smaller businesses that have been hard-hit by Covid-19 are likely to bounce back more strongly post-reopening, in our view, especially if there’s still a ‘gap’ relative to where normalisation is further advanced.

That said, maintaining favourable financing conditions to support the economic recovery is very important. This is why we would expect ongoing central bank support and, potential, extra easing. This will likely help mitigate credit impairment in the private sector. And it’s likely to enable governments to finance fiscal stimulus programmes at affordable rates.