UK economy contracting faster than in 2008 financial crisis, new surveys show

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The UK economy is suffering a steeper drop in activity than during the financial crisis of 2008 thanks to the government’s efforts to suppress the spread of Covid-19, according to the latest surveys of businesses.

The Purchasing Managers’ Index (PMI) for services firms in March, released this morning, showed a dramatic fall into contraction territory this month.

And the composite PMI measure – which combines services and manufacturing readings – was at its weakest since the series began in 1998.

The latest composite reading is 37.1, lower than the 38.1 registered in the depths of the global financial crisis.

Any reading below 50 signals a contraction of activity.

The readings are consistent, on historical patterns, with UK GDP contracting by 1.5 to 2 per cent in the first quarter of 2020, which would be in line with the worst rate of contraction during the 2008-09 recession.

However, the surveys were between 12 and 20 March, before the Government advised the public not to visit pubs and restaurants to suppress the spread of Covid-19.

And the full lockdown announced by Boris Johnson yesterday evening is expected to crush economic activity even more drastically.

“This decline will likely be the tip of the iceberg and dwarfed by what we will see in the second quarter,” said Chris Williamson, chief business economist at IHS Markit, which runs the survey.

“The colossal drop in the composite PMI – more than three times bigger than its previous record decline – signals clearly that the economy is hurtling towards a deep recession,” said Samuel Tombs of Pantheon.

“We judge that the drop in GDP in Q2 will be at least twice as big as currently signalled by Markit’s PMI, though at this stage the duration of emergency measures to keep people in their homes is anyone’s guess.”

Some economists say that the fall in GDP in the second quarter could be between 10 and 20 per cent.

Separately, an industry survey from the CBI business group released today showed its measure of manufacturing expectations for the next three months sank to -20 from +8 in February, also the weakest reading since the financial crisis.

The latest PMI surveys for the eurozone, also released today, showed record lows in activity in March, reflecting the Covid-19 suppression measures put in place in many countries across the continent.

According to IHS Markit, the eurozone survey data is “indicative of an 8 per cent annualised decline in eurozone GDP, and it is unlikely that the index has hit rock bottom yet”.

Some countries, such as Italy and France, implemented lockdown policies on their populations before the UK.