Recovery slows as new lockdowns bite

Covid’s second wave is taking the wind out of Britain’s sails as new restrictions hit the hospitality industry and local lockdowns limit demand.

Businesses still grew in October but at a reduced pace as new orders fell and tepid demand from abroad kept exports weak.

IHS Markit’s purchasing managers’ index (PMI) survey slipped to 52.9 from September’s 56.5.

It is above 50 and so indicates growth, but shows a sharp slowdown on the month.

This was driven by the services industry, which suffered a more severe deceleration than manufacturing, because of restrictions on social contact.

The survey found that pent-up demand for manufactured goods remains strong, while strong property sales are also boosting related services. It is hospitality and travel businesses that are struggling more because of new Covid rules.

Employment fell for the eighth consecutive month, the survey showed, indicating the new changes to the Job Support Scheme could have come just in time to limit the rise in unemployment.

Economists at Goldman Sachs estimate the survey is consistent with GDP remaining 7.5pc below its pre-pandemic peak, continuing the rebound from the trough of more than a quarter, but remaining well short of a full recovery.

It may not last at this level with restrictions tightening up.

“It is the trajectory that’s worrying. And this is before the tighter Covid-19 restrictions implemented in recent weeks, which have forced the hospitality sector in a number of regions to close again, have been felt,” said Paul Dales at Capital Economics.

This “supports our view that GDP will stagnate, if not contract, in the last three months of the year”, he added. “If the economy is heading for a double-dip, at least the second leg down will be smaller than the first.”

Jacob Nell at Morgan Stanley predicts a fall of 0.2pc in GDP in the final quarter of the year.

“This double dip implies the UK faces a more volatile and complex W-shaped recovery, rather than the (relatively) V-shaped recovery we had previously expected,” he said.

“Chancellor Rishi Sunak has already announced more support. We think a Bank of England U-turn [on more stimulus] is coming too.”