UK economic sentiment deteriorates even before lockdown

Economic sentiment in the UK dropped in the first half of March as the coronavirus crisis began to have an impact and threaten jobs, even before restrictions such as social distancing were imposed.

The monthly figures from the European Commission showed that a deterioration in sentiment across businesses in the services and manufacturing sector as well as among consumers dragged the overall UK sentiment to 92 in March from 95.5 in February, well below the historical average of 100.

The figures are among the first indications of the likely economic blow to the economy as official output data are only published after weeks of time lag.

However, the data collection predates the UK’s closure of all non-essential shops and the introduction of social distancing measures on March 23. 

Line chart of Long-term average=100 showing UK economic sentiment has dropped

The fall in UK economic sentiment was “just a small taste of things to come” said Thomas Pugh, UK economist at Capital Economics, a consultancy. “A much sharper drop in confidence is almost certainly in store for April.”

The UK’s decline was small compared with the EU where economic sentiment fell to 94.8 from 103, the largest monthly fall since records began in 1985, driven by a dramatic drop in Italy, the first country to introduce a nationwide coronavirus lockdown. 

Italy’s fall in sentiment “probably is a better guide to the state of sentiment in Britain right now”, said Samuel Tombs, chief UK economist at the consultancy Pantheon Macroeconomics. With a similar fall in sentiment to Italy, gross domestic product would be “on course for a 1.5 per cent quarter-on-quarter drop in Q1, followed by a huge decline of about 13 per cent in Q2”.

The UK’s decline in sentiment was broad-based across both the manufacturing and services sectors, as well as among consumers. 

The economic sentiment is reported as a single figure compared with a historical average and reflects the trends in services, industry, consumers, retail and construction. The score for each sector, by contrast, shows the proportion of businesses recording an improvement in economic conditions minus those reporting a deterioration. 

The index for the manufacturing sector dropped to minus 21 in March from minus 1.2 in February, with a negative figure indicating that the proportion of businesses reporting deteriorating activity outnumbered those reporting an expansion. 

Even in the first half of March, the crisis was hitting jobs, according to the survey, as employment expectations in the manufacturing sector dropped to the lowest level since the financial crisis in 2009.

Businesses in the dominant services sector remained marginally less pessimistic than in the manufacturing sector, but their demand expectations for the next three months dropped 21 percentage points to minus 6.5, the second-largest monthly drop since records began in 1997.

The deterioration in services demand expectation raises fears for the resilience of a sector that largely sustained growth over the past year while industrial production suffered from weakening international demand.

The health emergency also wiped out consumers’ improved mood after some Brexit uncertainty had dissipated. The European Commission consumer sentiment index dropped 2 percentage points to minus 8.2 per cent in March.

The index for the retail sector was largely stable at minus 12.9 per cent in March, a figure much worse than the minus 6.1 for the EU average, which points to a sector that was struggling even before the coronavirus crisis led to a near-complete halving of activity.


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