May 5, 2020 / 8:37 AM / 20 days ago

British economy on track for biggest contraction 'in living memory'

LONDON (Reuters) - Britain’s economy is on course for an unprecedented 7% quarterly contraction after measures to slow the spread of the coronavirus forced company closures across the country last month, a business survey showed on Tuesday.

FILE PHOTO: An almost empty street is seen outside Cambridge University, as the spread of the coronavirus disease (COVID-19) continues, Cambridge, Britain, April 1, 2020. REUTERS/Andrew Couldridge/File Photo

Adding to the bleak mood, figures earlier on Tuesday showed monthly car sales had dropped to their lowest since 1946 due to the closure of showrooms, while around a quarter of workers are now on a government-funded furlough.

IHS Markit said its Purchasing Managers’ Index (PMI) for the services sector fell to its lowest since the survey started in 1996, dropping to 13.4 in April from 34.5 in March, only a fraction better than an initial flash estimate of 12.3.

Last week’s manufacturing PMI was similarly dire and IHS Markit said that, taken together, they pointed to the deepest economic downturn “in living memory”.

A composite PMI of the two sectors dropped to a record-low 13.8 in April from 36.0 in March, far below the 50 mark that divides growth from contraction, indicating a 7% quarterly fall in gross domestic product, IHS Markit said.

“We expect the actual decline in GDP could be even greater,” IHS Markit economist Tim Moore said.

Britain’s services PMI does not include retailers, who have been hardest hit by store closures since the March 23 lockdown, or many of the self-employed.

Howard Archer, economist for forecasters EY ITEM Club, said he expected GDP to fall by around 13% in the second quarter, assuming some lifting of restrictions.

Economies across the world have been battling the economic consequences of the coronavirus pandemic. Flash euro zone PMI data also hit a record low last month, and final figures are due on Wednesday.

Last month, government budget forecasters set out a scenario under which the British economy could contract as much as 35% in the three months to June due to the lockdown, and for annual output to fall by the most in more than 300 years.

UK LOCKDOWN UNDER REVIEW

Britain’s government will review the lockdown this week, but so far ministers have said it is too soon to relax restrictions to stem the pandemic that has claimed more than 32,000 lives, according to British data published on Tuesday - surpassing Italy as the worst death toll in Europe.

Britons have been told to stay at home except for exercise, essential shopping, some types of work and a small number of other reasons. The only businesses that reported doing well in the services PMI were those supporting online shopping, government contracts or financial services.

The services PMI showed a small rise in business expectations to 53.2 in April from a record-low 47.9 in March, which IHS Markit said reflected firms’ hopes that they would be allowed to reopen by the summer.

“However, service providers looking to re-establish business operations overwhelmingly commented that capacity would remain well below previous levels for an extended period and any timings remain highly uncertain,” IHS Markit’s Moore said.

Samuel Tombs, an economist at Pantheon Macroeconomics, said there were some signs the worst could be over, based on a recent pick-up in energy usage and the number of people driving further afield, though recovery would be slow.

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“With several sectors of the economy set to remain closed for business throughout the summer, and consumers’ confidence torn to pieces by COVID-19, we expect only about half of Q2’s huge drop in GDP to be reversed in Q3,” he said.

The government is discussing with company managers and trade unions how to allow more businesses to operate safely.

Under existing guidelines, stores such as supermarkets limit customer numbers and urge staff and shoppers to stay 2 metres apart.

Reporting by David Milliken; Editing by Hugh Lawson and Pravin Char

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