Strict restrictions in the UK on daily lives are causing havoc on the economy, revealed a closely watched survey released last week. The flash purchasing managers’ index (PMI) a timely indicator of the health of the British economy, plummeted to 53.2 in December, a 10-month low and down from 57.6 in November, according to IHS Markit and the Chartered Institute of Procurement and supply.
The steep drop was driven by the British services industry being hit by “tighter pandemic restrictions and renewed business uncertainty,” IHS Markit said. Greater reticence to socialise in a bid to avoid catching the Omicron strain, compounded by workers coming out of city centres after the government advised Britons to start working from home again, has severely hit demand for consumer-facing activities.
Chief business economist at IHS Markit, Chris Williamson, said the PMI underlines “the UK economy is being hit once again by Covid-19, with growth slowing sharply at the end of the year led by a steep drop in spending on services by households.”
A malfunctioning services industry will weigh heavily on the UK economy. The industry generates around 80 per cent of output, indicating the economy could be headed back into contraction this month and the early stages of next year, analysts warned.
Chief UK economist at Pantheon Macro-economics, Samuel Tombs said: “Near-real-time indicators have also weakened over the past two weeks particularly in the consumer services sector.” He added: “It’s looking highly likely then, that GDP will drop in December and January, driven by declines in consumer services activity.” Separate data published last week reveals the Omicron variant is dealing a blow to any optimism that people may have had. Consumer confidence edged back one point over the last month to minus 15 in December, research by GfK found. The dip has been driven by households’ confidence in their personal finances over the coming year taking a hit.
The survey indicates measures to curb the spread of the new variant and concern about catching it is already swaying consumers toward adopting a more cautious approach. Omicron has intensified uncertainty over the trajectory of the UK economy over the coming months as virus restrictions dial up once again in a bid to curb infections.
Client strategy director at GfK, Joe Staton, said: “News about the Omicron variant could not have arrived at a worse time for festive celebrations. “As thoughts began turning to Christmas and the New Year, Omicron jumped out of nowhere and threatened to bring Santa’s sleigh crashing to a halt.” GfK’s major purchase index went back three points to minus six in a sign retailers’ sales will be hit. Furthermore, retailers are faced with huge rent payments to landlords by the end of this quarter, despite plummeting seasonal sales.
Inflation too is a huge concern as it will affect household incomes triggering a snap back in consumer spending and weighing down economic growth. The British economy will grow 4.2 per cent next year, a downward revision from 5.2 per cent, according to projections made by the business group the British Chamber of Commerce (BCC).
The BCC expects inflation to scale to 5.2 per cent next spring, 0.2 percentage points higher than the Bank of England’s expectation. Ongoing delivery problems exacerbated by shortage of drivers and supply chain difficulties will affect trade flows, compounded by worker shortages and price rising rapidly, will also weigh on growth.
Head of economics at the BCC, Suren Thiru, said: “Consumer spending is likely to be more restrained than expected over the near term.” (The writer is our foreign correspondent based in the UK)
