UK business activity slows to weakest level since March

Supply-chain bottlenecks and high worker absences hampered the economic recovery

Britain’s post-coronavirus recovery slowed sharply in July to its weakest level since March as supply-chain bottlenecks and rising worker absences caused by Covid-19 isolation rules hampered business activity.

The IHS Markit/CIPS composite purchasing managers' index, considered a good gauge of economic health, dropped to 59.2 from 62.2 in June, while the services PMI sank to 59.6 in July from 62.4 in June. A reading above 50 still signals growth over contraction.

"A substantial loss of momentum was seen for new business growth during July, with this index the lowest since February," IHS Markit said.

"While many firms commented on strong consumer spending and a sustained recovery in demand for business services, there were also reports that Covid-19 isolation rules had negatively influenced sales volumes."

Britain's economy has rebounded quickly since restrictions were first eased in March after suffering its biggest fall in output in more than 300 years last year. However, economists think the fastest growth was recorded in the three months to June, when movement curbs were altered the most.

Service businesses were hit by a "pingdemic" last month, with thousands of workers forced to self-isolate for up to 10 days after being identified by the National Health Service's smartphone app as having had close contact with someone who had tested positive for coronavirus.

Tim Moore, economics director at IHS Markit, said July’s data shows the speed of the UK recovery has slowed in comparison to the second quarter of the year.

“More businesses are experiencing growth constraints from supply shortages of labour and materials, while on the demand side we have already seen the peak phase of pent up consumer spending,” said Mr Moore.

While July's final PMI readings were well above preliminary "flash" data, IHS Markit said this reflected a boost to services businesses from the lifting of most remaining Covid-19 restrictions in England on July 19.

Duncan Brock, group director at the Chartered Institute of Procurement & Supply, said with new orders at their weakest since February, demand in the services sector appears to be waning, along with business optimism after supply and staff constraints affected activity last month.

"Unfilled vacancies due to skills shortages and low stocks at suppliers meant further gains were obstructed and backlogs of work increased," Mr Brock said.

Meanwhile, price pressures rose by the most since the IHS Markit survey began 25 years ago – a concern for the Bank of England as it nears it interest rate decision on Thursday when it will reveal its latest inflation outlook. Until now, the BoE has said higher inflation will be a temporary factor.

Mr Brock said the relentless rise in input cost inflation added to capacity challenges because businesses were paying more for wages, transport and food, and consumers were beginning to bear the brunt, with onward price inflation the most elevated since the survey began in 1996.

"We suspect the best of the post-pandemic recovery could be behind us, especially if higher leisure and hospitality costs diminish appetite for consumer spending," he said.

Consumer Price Inflation hit 2.5 per cent in June, surpassing the 2 per cent target set by the BoE, with expectations it will go higher in the coming months as salary increases add pressure on prices through the summer.

Fawad Razaqzada, a market analyst at Think Markets, said the need for emergency stimulus measures by the BoE are receding fast as the economy recovers, with the National Institute of Economic and Social Research, an independent body, expecting inflation to climb to 3.9 per cent in early 2022.

“But like central bankers elsewhere in the developed world, Governor Andrew Bailey and his colleagues are still seen calling for patience on scaling back quantitative easing on Thursday," said Mr Razaqzada.

Looking ahead, Mr Moore said any re-acceleration of growth in August is unlikely, as new orders increased at a reduced pace at the start of the third quarter.

“Moreover, business expectations softened again during July, with UK firms the least optimistic about the growth outlook since January,” he said.

“Survey respondents cited worries about recruiting staff to meet business expansion plans and some suggested that escalating costs would hinder the recovery.”

Meanwhile, Eurozone business activity improved in July, expanding at its fastest pace in 15 years, as coronavirus restrictions were eased further and an accelerated vaccine drive injected life into the bloc's dominant service industry.

IHS Markit's final composite PMI reading climbed to 60.2 last month from June's 59.5, its highest level since June 2006, but supply chain disruption and labour shortages were still a factor for the economic bloc, with input prices surging at the fastest rate in more than two decades amid fears of further curbs to contain the more infectious Delta variant.

"The final PMIs show that the eurozone’s recovery continued apace at the start of the third quarter. Price pressures are continuing to mount and point to an increase in inflation in the coming months, but we expect this to be temporary," said Andrew Kenningham, chief Europe economist.

"Looking ahead, growth rates look certain to drop off a bit in August and September as activity gets closer to normal levels."

Updated: August 4th 2021, 1:37 PM