UK businesses grow at fastest rate in seven years as economy reopens
The UK economy bounced back sharply in August after coronavirus restrictions were lifted, with a closely-watched measure of growth hitting its highest level in almost seven years.
However, companies slashed jobs at the fastest pace since May as they adjusted to life during the pandemic, in a worrying sign of what could turn into a wave of unemployment.
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The IHS Markit/Cips composite purchasing managers’ index (PMI) soared to 60.3 in August from 57 in July, according to an early estimate.
The highest score in almost seven years, it was well above the 50 mark that indicates expansion and better than analysts’ expectations of 57.1.
“There were encouraging signs that customer-facing service providers have started to catch up with the rebound seen earlier this summer across the wider economy,” said Tim Moore, economics director at data firm IHS Markit.
Government spurs services sector but unemployment booms
The survey suggested the government was successful in spurring the UK’s consumption-focused economy this month. In July it revealed “eat out to help out” discount vouchers for restaurants in August. And it slashed VAT for the hospitality and tourism sectors.
Figures this week estimated that Britons had used the discount scheme 35m times.
However, companies slashed jobs in August at the fastest pace since May, IHS Markit said.
Despite the pick-up in growth, the UK economy is nowhere near the size it was before coronavirus hit. Firms said they cut jobs in response to lower demand and the need to reduce costs.
Read more: UK retail sales climb above pre-pandemic levels in July
Duncan Brock, group director at Cips, the Chartered Institute of Procurement & Supply, said: “Any celebration is premature.”
“Firms moved from the protection of furlough schemes to the harsh reality of job shedding.”
August PMI ‘bodes well’ for UK economy
Howard Archer, chief economic adviser to the EY Item Club, said the PMI survey showed the economy picking up markedly, “boding well for third-quarter growth prospects”.
The PMI survey, which questions company managers, showed that new orders grew for the second month running in August. Meanwhile, companies reported households were more willing to spend.
However, economists worry that a wave of unemployment could derail the recovery. Chancellor Rishi Sunak has committed to winding down the job retention scheme, which has supported more than 9m jobs, in October.
Firms reported that part of the reason they laid off workers so quickly in August was to cut costs before the end of the furlough scheme.
Business groups and opposition parties have called for further support for employment.
Mike Cherry, the chair of the Federation of Small Businesses, today said: “After months of measures to ensure job and business survival, the next stage is about how we can grow once again to aid business and job creation.”
Ruth Gregory, senior UK economist at Capital Economics, said rising joblessness poses a threat to the economy. She predicted the summer rebound “will give way to a much slower recovery in the second half of this year”.