uk recovery tracker - lloyds bank · france japan ihs arkit government response index, july 2020 45...

UK Recovery Tracker – Introduction

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UK Recovery Tracker

By the side of business

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Welcome to the Lloyds Bank UK Recovery Tracker. In this new, monthly report we provide key insights into the shape and pace of the UK‘s economic recovery.

The COVID-19 pandemic has had a major impact on the world economy. Earlier this year, global activity collapsed as governments around the world took drastic measures to contain the spread of the virus, including the widespread closure of non-essential business and restricting movement and travel. In the UK alone, the level of economic activity, or GDP, fell by over 25% across March and April combined as a direct result of such actions.

On a more positive note, as this report highlights, the UK and broader global economy have entered the recovery phase as lockdown measures have been eased. Nevertheless, given the nature and scale of the pandemic’s impact, there remains an unusually high degree of uncertainty around the outlook, particularly given that its effects have been varied

Introductionacross countries and industries. As such, the situation remains extremely fluid.

Working in collaboration with IHS Markit, and leveraging their Purchasing Managers’ Indices (PMI), this publication provides a comprehensive overview of the evolving economic situation. The report tracks the recovery as some countries continue to navigate the rapid spread of the virus, while others fear a resurgence or second wave.

We monitor the progress of the major economies against the relative stringency of their lockdown measures, revealing those with more scope for growth given their current progress and relative levels of containment.

The performance of global industry sectors is presented, again highlighting the close link between activity and mandatory measures aimed at tackling the pandemic.

As well as assessing how the UK economy is faring in a global context, this report

considers the momentum and sustainability of the recovery.

For the first time, we are able to share unique insights for the UK at an industry level, with survey data on 14 key sectors. By using comments from survey respondents, we are also able to assess the extent to which topical themes feature in their current thinking and expectations for the future.

The UK economy is in uncharted waters and the future trajectory of the pandemic is yet to be fully understood or managed. This report is aimed at improving understanding of the issues that matter to businesses.

The next few months will be a crucial time for businesses of all sizes, across all sectors. Our relationship teams and product specialists are available online and, on the phone, to talk through these findings to help you understand and identify key business challenges and help develop the best solutions to support your recovery.

Survey responses from carefully selected companies are collected by IHS Markit to indicate the direction of change compared to the previous month for a range of variables, such as output, new orders, employment and prices.

‘Diffusion’ indices are then calculated by taking the sum of the percentage of ‘higher’ responses and half the percentage of ‘unchanged’ responses.

The individual indices vary between 0 and 100, with values above 50.0 signalling expansion and below 50.0 indicating contraction. The distance from the 50.0 no-change mark signals the implied rate of change in the variable, the further from 50.0 the faster the rate of change indicated.

Jan = Growth

Feb = Growth, faster rate

Mar = Growth, same rate

Apr = Growth, slower rate

May = No change

UK sectors recorded stronger growth in July than their global sector equivalents

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Index interpretation50 = no change

Feb Mar Apr May Jun Jul Aug Sep Oct

Jun = Decline

Jul = Decline, faster rate

Aug = Decline, same rate

Sep = Decline, slower rate

Oct = No change

12 out of 14 All 14UK sectors were optimistic in July about the outlook for future output

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Italy

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Australia

Australia

Ireland

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IrelandUK

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SLOWER RATE OF DECLINEOutput index vs. previous month

Output index

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OUTPUT RISING, SLOWER RATE OF GROWTH

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IHS Markit Government Response Index, July 2020

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UK Recovery Tracker – Global context

Global context

3. Stringency measures vs output PMI2. Stringency changes vs output PMI changes in July1. Global output performance

Worldwide PMI data reveal a synchronised upswing in economic activity as lockdown measures were eased across most major developed and emerging markets. The Global PMI rose to 50.8 in July, from 47.8 in June, taking it above the no-change 50.0 level for the first time in six months, consistent with expanding output across the combined manufacturing and service sectors. Chart 1 shows the sharp contrast between prevailing economic

conditions in April and July. After unprecedented declines to record lows for many economies in April, reflecting the timing of lockdowns, July PMI output indices saw further gains over June for most countries, with the majority now above the key 50 level. The speed of the recovery in the UK economy compared favourably with elsewhere in Europe during July, albeit from an exceptionally low base following the deeper retrenchment seen

in the UK in the second quarter of 2020. China represents an important leading signal for the speed and trajectory of the global recovery and so it’s encouraging to see solid output growth for a third month in July. Meanwhile, the US PMI only just returned to growth territory in July, potentially reflecting the impact of tighter restrictions due to rising infections. India stands out as experiencing the most abrupt loss of momentum, with its PMI

dropping by more than 40 points in April and remaining low in recent months as the country struggles to contain the public health emergency. Chart 2 shows the change in government stringency measures (calculated by IHS Markit) and the PMI Output Index since June. The ‘Government Response Index’ score (0 to 100) captures the overall severity of restrictions across seven categories, ranging from school closures through to bans on

Composite PMI Output index (July 2020), 50 = no changeComposite PMI Output index (July 2020), change vs previous month50 = no change

ItalyAustralia

China

Ireland

United Kingdom

Spain

Germany

United States

RussiaBrazil

India

France

Japan

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July 2020 April 2020

mass gatherings to limiting the movement of people. It highlights that countries that rolled back stringency in July have typically seen an acceleration in economic growth (countries in the top right hand box). Clustering in this corner illustrates that reopening is a big driver of the recovery momentum signalled by the latest PMI data. Of the nine countries to loosen restrictions, eight saw a turnaround in their PMI readings during July. Brazil was

a notable outlier, however, with a comparatively fast rollback of restrictions but only a muted rebound in output. Only the US and Australia saw an improved PMI reading without loosening restrictions. The chart below shows a comparison of national PMI data and government stringency levels in July. It highlights a wide divergence in both the current level of restrictions and relative economic performance across countries.

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UK Recovery Tracker – Global context

4. Global sector performance in July vs AprilNotably, as chart 3 shows, the likes of China, France and Germany have the least tight restrictions, which has manifested itself through stronger recoveries in their respective economies. In contrast, the recovery in India is the weakest, consistent with restrictions there being the tightest. However, it also suggests significant scope for catch up in the future.

Government stringency measures across the world also continue to have a major impact on the performance of industry sectors, with nine out of the fourteen categories monitored by our recovery tracker registering expansion in July, up from just two in June.

Although the July PMI data continued to highlight a multispeed recovery across global sectors, the degree of variation has narrowed considerably since the worst phase of the downturn. For example, the index point

difference between the best and worst performing industry sectors was approximately four times larger in April than that seen in July.

As lockdown restrictions have been eased, industries within manufacturing have been relatively quick to restart production and rebuild supply chains, whereas consumer facing service providers across the world have experienced more significant challenges in adapting to social distancing measures.

Reflecting this, output growth was strongest among Automotive & Auto Parts producers in July (55.9), followed by Chemicals (55.3) and Household Products (54.4). The worst-performing global sector was Tourism & Recreation (45.6), which has been the case in almost every month of the pandemic despite some easing of international travel restrictions in Europe and renewed domestic activity in some countries.


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Output index, 50 = no change0UTPUT RISING, SLOWER RATE OF GROWTH

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Output index vs previous month

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UK Recovery Tracker – UK recovery

UK recovery

5. UK sector performance in July vs global benchmark 6. UK sector performance in July vs April 50 = no change50 = no change

The recovery of UK industry sectors against their respective global benchmarks indicates a clear shift from underperformance in the second quarter of 2020 to outperformance in July.

As chart 5 shows, twelve out of fourteen UK sectors saw stronger output growth than their global sector equivalents.

Metals & Mining, Software & Services, Beverages & Food and Chemicals were most ahead of the global index level.

A restart of domestic manufacturing supply chains and a tentative rebound in corporate spending were the main factors driving the UK outperformance across a number of industrial categories

in July. With factory production still well below pre-pandemic levels, the Industrial Services category was relatively subdued in July and the output index close to par with the global benchmark.

At the same time, widespread working from home and ongoing international travel restrictions meant that the Transportation

Services category outperformed the global benchmark by only a small margin.

Technology Equipment was the greatest laggard, although the downturn in output during July matched the trajectory seen elsewhere in the world. In part, this likely reflected the impact of ongoing trade tensions between the US and China.


Real Estate

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Industrial Services

Chemicals

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UK sector PMI output index (July)

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Tourism & Recreation was another sector to experience weaker output than the equivalent worldwide measure, largely reflecting the staggered reopening of consumer-facing businesses across the UK.

When comparing output trends during July to the economic low point back in April, all major parts of the UK economy have made strides along the path to recovery, as shown by chart 6.

Metals & Mining was the best-performing, with a rapid turnaround in both June and July as rising demand for essential manufacturing materials and sales to reopened automotive plants helped to bolster production volumes.

Technology Equipment was the only sector to register a decline in its PMI in July, registering the lowest outturn across the 14 sectors monitored by our Recovery Tracker.

of UK sectors reported an increase in output in July, up from 57% in June and 0% in April

Metals & Mining is the most optimistic sector, with around 7 out of 10 firms expecting output to be higher in 12 months' time

A reduced pace of headcount reduction can be seen across all sectors in July relative to April

73%

86%

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7. UK sectors ranked by % reporting lower/higher output 8. UK sectors ranked by business expectationsFuture Output Index, 50 = no change in next 12 months

A closer inspection of output trends confirms that all 14 sectors have seen an improvement since April. Chart 7 shows the split of firms reporting higher/lower output in April and July. Across all sectors, the proportion of firms reporting lower output in July was significantly less than in April. Notably, this improvement was also reflected in higher output levels, with a significant increase in the proportion of firms reporting increases in output compared to April.

However, there were continuing reports citing supply chain challenges, rising air freight costs and US-China trade tensions as factors holding back output in some sectors. Over half of all Technology Equipment manufacturers (52%) reported lower output in July.

At the other end of the scale, just 15% of companies in the Healthcare segment reported lower activity in July. This sector once again saw a strong overall expansion of activity, helped by sustained growth across the domestic manufacturing supply

chain and rising provision of private healthcare services.

Staying focused on the main growth drivers in July, business activity across financial services continued to stage a broad-based rebound. Real Estate moved quickly from steep contraction in the spring to early signs of recovery at the start of the third quarter (more than 40% of firms reported an expansion of business activity in July).

Encouragingly, chart 8 shows that all fourteen UK sectors remain optimistic (reflected by a Future Output Index of above 50) about their prospects for growth over the next 12 months, albeit in some cases from an extremely low base.

Mirroring the trend for output levels in July, the Future Output Index is the highest for Metals & Mining. The sectors least confident are all highly dependent on either social interaction, retail spending or mobility – namely Tourism & Recreation, Real Estate and Transportation. 9070 806050

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Real Estate

Banks

Transportation

Industrial Services


Chemicals

Software & Services

Healthcare

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Household Products


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Beverages & Food

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Automobiles & Auto PartsBanks

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9. UK sectors ranked by % reporting lower/higher employment

10. UK sectors ranked by % reporting lower prices charged

The extent to which firms’ confidence evolves, especially around their ability to secure new business and deliver sustained increases in future output, will play a crucial role behind developments in the labour market.

In charts 9 and 10, we assess the sustainability of the UK recovery from the perspective of employment trends and prices charged since the pandemic.

Chart 9 shows the split of firms reporting higher/lower employment in April and July. In April, more than half of all businesses in five UK sectors reported a decline in workforce levels. This was most commonly seen among manufacturers of Automobiles & Auto Parts (63%), Tourism & Recreation (58%) and Real Estate (58%) amid business closures in response to the public health emergency. The most resilient areas for jobs were Healthcare (31%) and Technology Equipment (31%).

Relative to April, the July data highlighted a slower pace of headcount reduction,

but this still suggested that firms continued to scale back operating capacity across most sectors. This potentially reflected concerns of only a partial recovery in longer-term demand from the levels seen prior to the COVID-19 pandemic. Healthcare and Software & Services were the exceptions, with both recording net jobs growth in July.

Another major challenge holding back staffing numbers, and the sustainability of the recovery, has been a steep increase in business expenses as operations are adapted to incorporate new social distancing measures.

At the same time, firms’ ability to pass on cost increases has been constrained against a backdrop of exceptionally low demand during the second quarter of 2020. As chart 10 shows, a sizeable proportion of firms are adopting price discounting strategies to secure new sales in July, especially in Tourism & Recreation and Real Estate, but reports of discounting were less extensive in July relative to April.

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Technology EquipmentTourism & Recreation

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Companies furloughing staff

Companies making reduncancies

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11. Portion of UK panel comments attributing lower output to COVID-19

12. Panel mentions of furlough / redundancy / recallPercentage of survey respondents

Percentage of survey respondents

IHS Markit's PMI surveys ask contributing companies to report on monthly changes in key business metrics such as activity, new orders, exports, input prices, inventories, employment and future expectations.

Alongside the three standard responses (‘higher’, ‘lower’, ‘unchanged’), panellists are also invited to provide additional qualitative information on the

reasons as to why these variables have changed from the previous month. A panel comments tool tracks the frequency of words or phrases mentioned in these qualitative replies and some of the key findings are presented here.

A key measure of recovery potential across the UK economy will be the extent to which businesses perceive that COVID-19 is the main factor holding back output volumes.

This is shown in chart 11. Positively, the July data shows that only around one-in-four businesses saw lower output and linked this directly to COVID-19. The proportion stood at just 15% for manufacturing, 28% for the service sector and 24% in the construction industry. In contrast, more than two thirds of UK firms reported a negative impact on output from the pandemic in April. The fall

in this metric in July reflects both a decline in the number reporting cutbacks to output and a more broadly spread list of negative factors reported by survey respondents after the main impact of lockdowns due to COVID-19 had passed.

Business confidence will have a crucial impact on the overall size of firms’ workforces, particularly as government support under the Coronavirus Job Retention


Scheme (CJRS) UK Recovery Tracker – UK recovery is gradually withdrawn from August. Given the lagging nature of official labour market data, surveys provide a more up-to-date picture on current employment trends.

Across the UK private sector as a whole, our tracker of PMI survey respondent comments in relation to the specific question around employment, shows that mentions of ‘redundancies’ were equally as prevalent as ‘furloughing staff’ when reporting on their staffing trends in July, as shown by chart 12. The proportion of survey respondents mentioning recalling or rehiring staff has nonetheless increased in each month since April, while those noting furlough as a factor behind lower employment has dropped substantially over this period.

Overall, these figures illustrate that labour market conditions have started to stabilise, but progress has been exceptionally slow and redundancy programmes are becoming more common as the end of the government’s job retention scheme approaches.

Portion of firms mentioning recalling /rehiring staff has increased in each month since April

Mentions of redundancies equally prevalent as 'furloughing staff' in July

firms reported lower output and a negative impact from COVID-19 in July

15% of Manufacturing 28% of Services 24% of Construction

Down from around '2 in 3' in April

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UK Recovery Tracker – Breakdown of UK sectors

Breakdown of UK sectors

In this section, we provide some additional detail for the 14 UK sectors covered in this report.

This chartbook provides a timely update of how far recoveries have progressed, and the degree to which the sector has tracked the overall UK economy benchmark (see opposite).

*Detail for the Construction Sector, which is available as a separate PMI survey from IHS Markit, is provided for additional insight.

UK Employment Index

UK Output Index July 2020: 57.0

July 2020: 39.6

July 2020: 70.4UK Future Output Index Click an icon to switch to the relevant page, or scroll through one by one

50 = no change Source: IHS Markit

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Banks

Employment Index

Employment Index

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Output Index

July 2020: 64.4

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July 2020: 34.1

July 2020: 40.3

July 2020: 77.8

July 2020: 70.5

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UK Employment Index July 2020: 39.6UK Output Index July 2020: 57.0 UK Future Output Index July 2020: 70.4 50 = no change

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Employment Index

Employment Index

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Output Index

July 2020: 62.7

July 2020: 65.6

July 2020: 43.2

July 2020: 45.1

July 2020: 80.0

July 2020: 74.9

Future Output Index

Future Output Index

Source: IHS Markit

50 = no changeUK Employment Index July 2020: 39.6UK Output Index July 2020: 57.0 UK Future Output Index July 2020: 70.4

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Employment Index

Output Index

Output Index

July 2020: 63.1

July 2020: 64.3

July 2020: 50.2

July 2020: 46.6

July 2020: 80.8

July 2020: 73.7

Future Output Index

Future Output Index

Source: IHS Markit


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Output Index

July 2020: 57.3

July 2020: 51.1

July 2020: 42.9

July 2020: 40.4

July 2020: 68.7

July 2020: 67.5

Future Output Index

Future Output Index

Source: IHS Markit


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Output Index

Output Index

July 2020: 74.7

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July 2020: 39.8

July 2020: 46.7

July 2020: 84.6

July 2020: 61.8

Future Output Index

Future Output Index

Source: IHS Markit


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July 2020: 77.0

July 2020: 68.8

Future Output Index

Future Output Index

Source: IHS Markit


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80

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Employment Index

Employment Index

Output Index

Output Index

July 2020: 44.6

July 2020: 53.4

July 2020: 32.0

July 2020: 45.7

July 2020: 58.7

July 2020: 64.8

Future Output Index

Future Output Index

50 = no change

Source: IHS Markit

UK Employment Index July 2020: 39.6UK Output Index July 2020: 57.0 UK Future Output Index July 2020: 70.4

17


Construction

0

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Employment IndexOutput Index July 2020: 44.6 July 2020: 32.0 July 2020: 58.7Future Output Index

50 = no change

Source: IHS Markit

UK Employment Index July 2020: 39.6UK Output Index July 2020: 57.0 UK Future Output Index July 2020: 70.4

18

UK Recovery Tracker – Methodology

MethodologyThe Lloyds Bank UK Recovery Tracker includes indices compiled from responses to IHS Markit's UK manufacturing, services and construction PMI® survey panels, covering over 1,500 private sector companies.

The report also features IHS Markit Global Sector PMI indices, which are compiled by IHS Markit from responses to questionnaires sent to purchasing managers in IHS Markit's global PMI survey panels, covering over 27,000 private sector companies in more than 40 countries.

IHS Markit maps individual company responses to industry sectors according to standard industry classification (SIC) codes, covering the basic materials, consumer goods, consumer services, financials, healthcare, industrials and technology sectors across varying tiers of detail.

The Lloyds Bank UK Recovery Tracker monitors the following 14 individual UK and Global sectors:

Chemicals

Metals & Mining


Beverages & Food

Household Products


Banks

Real Estate

Healthcare

Industrial Goods

Industrial Services

Transportation


Software & Services

JEAVON LOLAYManaging Director, Economics and Market Insights, Global Transaction Banking, Lloyds Bank

T: +44 738 534 7141 E: [email protected]

ANDY BROWNDirector, Commercialisation & Propositions, Global Transaction Banking, Lloyds Bank


TIM MOOREDirector, Economic Indices, IHS Markit


The editors

Click here or scan the code to read our Road to Recovery interactive guide

Euromoney Awards for Excellence 2020 – Western Europe's Best Digital Bank:Lloyds Banking Group

Survey responses are collected in the second half of each month and indicate the direction of change compared to the previous month. Global survey responses are weighted by country of origin, based on sectoral gross value added. A diffusion index is calculated for each survey variable.

The index is the sum of the percentage of ‘higher’ responses and half the percentage of ‘unchanged’ responses. The indices vary between 0 and 100, with a reading above 50 indicating an overall increase compared to the previous month, and below 50 an overall decrease. The indices are then seasonally adjusted.

The Purchasing Managers’ Index (PMI) survey methodology has developed an outstanding reputation for providing the most up-to-date possible indication of what is really happening in the private sector economy by tracking variables such as sales, employment, inventories and prices. The indices are widely used by businesses, governments and economic analysts in financial institutions to help better understand business conditions and guide corporate and investment strategy. In particular, central banks in many countries use the data to help make interest rate decisions. PMI surveys are the first indicators of economic conditions published each month and are therefore available well ahead of comparable data produced by government bodies.

For further information on the PMI survey methodology please contact [email protected].

mailto:jeavon.lolay%40lloydsbanking.com?subject=

mailto:andrew.ad.brown%40lloydsbanking.com?subject=

mailto:[email protected]

https://lloyds.turtl.co/story/coronavirus-support-for-your-business/

19

UK Recovery Tracker – Important Information

IMPORTANT INFORMATIONThis document has been prepared for information purposes only and must not be distributed, in whole or in part, to any person without the prior consent of Lloyds Bank plc (together with its affiliates, “Lloyds Bank”). This document should be regarded as a marketing communication, it is not intended to be investment research and has not been prepared in accordance with legal requirements to promote the independence of investment research and should not necessarily be considered objective or unbiased. This document is not independent from Lloyds Bank’s proprietary interests, which may conflict with your interests. The authors of this document may know the nature of Lloyds Bank’s proprietary interests or strategies; Lloyds Bank may engage in transactions in a manner inconsistent with the views expressed in this document; and Lloyds Bank’s salespeople, traders and other professionals may provide oral or written market commentary or strategies to clients which may conflict with the opinions expressed in this document. Securities services offered in the United States are offered by Lloyds Securities Inc., a broker-dealer registered with the U.S. Securities and Exchange Commission and a member of the Financial Industry Regulatory Authority.

Any views, opinions or forecast expressed in this document represent the views or opinions of the author and are not intended to be, and should not be viewed as advice or a recommendation. Lloyds Bank makes no representation and gives no advice in respect of legal, regulatory, tax or accounting matters in any applicable jurisdiction. You should make your own independent evaluation, based on your own knowledge and experience and any professional advice which you may have sought, on the applicability and relevance of the information contained in this document.

The material contained in this document has been prepared on the basis of publicly available information believed to be reliable and whilst Lloyds Bank has exercised reasonable care in its preparation, no representation or warranty, as to the accuracy, reliability or completeness of the information, express or implied, is given. This document is current at the date of publication and the content is subject to change without notice. We do not accept any obligation to any recipient to update or correct this information. Lloyds Bank, its directors, officers and employees are not responsible and accept no liability for the impact of reliance on, or any decisions made based upon, the information, views, forecasts or opinion expressed.

Lloyds Banking Group plc and its subsidiaries may participate in benchmarks in any one or more of the following capacities; as administrator, submitter or user. Benchmarks may be referenced by Lloyds Banking Group plc for internal purposes or used to reference products, services or transactions which we provide or carry out with you. More information about Lloyds Banking Group plc’s participation in benchmarks is set out in the Benchmark Transparency Statement which is available on our website.

This document has been prepared by Lloyds Bank. Lloyds Bank is a trading name of Lloyds Bank plc, Bank of Scotland plc and Lloyds Bank Corporate Markets plc. Lloyds Bank plc. Registered Office: 25 Gresham Street, London EC2V 7HN. Registered in England and Wales no. 2065. Bank of Scotland plc. Registered Office: The Mound, Edinburgh EH1 1YZ. Registered in Scotland no. SC327000. Lloyds Bank Corporate Markets plc. Registered Office: 25 Gresham Street, London EC2V 7HN. Registered in England and Wales no. 10399850. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority under registration number 119278, 169628 and 763256 respectively.

Lloyds Bank Corporate Markets plc, Singapore Branch. Registered Office: 138 Market Street #21-01 Capitagreen, Singapore 048946. Registered in Singapore UEN: T18FC0067A. Licensed and regulated by the Monetary Authority of Singapore. Your contractual counterparty will be Lloyds Bank Corporate Markets plc if you enter into any product or transaction with us in Singapore.


20

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August 2020

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