UK's post-lockdown recovery loses steam as household demand weakens

The survey still showed strong growth in Britain's services and manufacturing sectors

LONDON (Reuters) - Britain’s recovery from the coronavirus lockdown lost some momentum this month, a business survey showed, as consumer-facing sectors suffered from the end of a government subsidy to support restaurants and more general COVID-related worries.

The IHS Markit/CIPS flash composite Purchasing Managers’ Index (PMI) dropped to a three-month low of 55.7 after hitting a six-year high of 59.1 the month before, a slightly larger drop than economists had forecast in a Reuters poll.

The survey still showed strong growth in Britain’s services and manufacturing sectors, but reflected a slowdown in new orders and the weakest confidence about future output since May.

British GDP fell more than 20% during the second quarter, the biggest drop of any G7 economy, and the Bank of England expects third-quarter output to be around 7% below its level before the crisis.

Businesses in the survey said they were reducing staff numbers for a seventh consecutive month -- the longest such run since 2010 and one which bodes poorly for many workers when government job support measures expire at the end of next month.

“Unemployment is likely to soon start rising sharply ... (which) raises fears that growth could fade further as we head into the winter months, especially as lockdown measures are tightened further,” IHS Markit economist Chris Williamson said.

Britain’s central bank forecast last month that unemployment would jump to 7.5% in the final three months of this year from 4.1% during the three months to July.

September’s fall in activity came before the government announced on Tuesday that it would require pubs and restaurants to close by 10 p.m. -- probably for the next six months -- and backtracked on a drive for employees to return to offices rather than work from home.

The change in the government’s approach, less than a month after it was offering half-price incentives for people to dine in restaurants and discouraging working from home, comes after a big rise in new COVID-19 cases, also seen elsewhere in Europe.

Testing capacity has come under strain since schools in England reopened at the start of September.

IHS Markit said the weakening in growth was concentrated in sectors that relied on consumer demand, and services activity slowed more than manufacturing.

“The restaurant sector in particular saw demand fall sharply as the Eat Out to Help Out scheme was withdrawn,” Williamson said. “Demand for other consumer-facing services also stalled as companies struggled amid new measures introduced to fight rising infection rates, and consumers often remained reluctant to spend.”