Home Economy UK recovery slows as price pressures rise, survey shows

UK recovery slows as price pressures rise, survey shows

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The UK’s economic recovery slowed at the end of the third quarter, but price pressures became more intense as companies passed on the rising costs of wages, transport and raw materials, a closely watched survey showed on Thursday.

The flash, or interim, composite purchasing managers’ output index published by the research group IHS Markit and the Chartered Institute of Procurement and Supply dropped to 54.1 in September from 54.8 in August, the softest reading since before the economy began to reopen in March.

Growth was driven by the services sector, where companies reported rising consumer confidence and a boost from staycation business.

But supply chain disruption has all but choked off growth in manufacturing: Markit’s output index for the sector fell to 51.8, indicating that only a small majority of businesses had seen an expansion. Growth in new orders sank to a seven-month low.

Economists said the survey gave Bank of England policymakers grounds to wait for the recovery to develop before raising interest rates — even as the US Federal Reserve prepares to tighten policy.

James Smith, economist at ING, said the survey underlined “that the recovery is stalling as we head into winter”, with rising energy prices, tighter fiscal policy and the possible fallout from furlough’s end likely to mean that “a Bank of England rate hike is still some way off”. 

Samuel Tombs, at the consultancy Pantheon Macroeconomics, said the slowdown was chiefly due to weak demand, adding that with higher inflation and benefits cuts eating into households’ disposable income, the pace of recovery “looks set to remain sluggish through the winter”.

Price pressures have surged even as the UK’s post-lockdown recovery lost steam, the survey showed. A rising proportion of companies said input prices had gone up — citing higher wages, raw material prices and transport costs. The proportion of companies that had increased selling prices rose to the highest level in the survey’s 25 year history.

Chris Williamson, chief business economist at IHS Markit, said the data would “add to worries that the UK economy is heading towards a bout of ‘stagflation’, with growth continuing to trend lower while prices surge ever higher”.

There were clear signs of demand cooling, and of activity being held back by shortages of materials and labour — especially in food, drink and auto manufacturing, Williamson added.

Companies were still hiring rapidly in the services sector, keeping the rate of job creation close to the record high recorded in August.

Bethany Beckett, at the consultancy Capital Economics, said this could be “the bright spot” of the surveys for policymakers, since it suggested unemployment would not rise too sharply as the government’s coronavirus furlough scheme ended.

But employment growth in manufacturing slowed, with some companies struggling to find suitable staff, and others aiming to cut the size of their workforce as demand slackened, IHS Markit said.

The UK data paints a similar picture to purchasing manager surveys in the eurozone, also published on Thursday, which showed supply chain problems weighing on manufacturing and price pressures rising.

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