Britain’s economic recovery lost more momentum in August than forecast

Services growth sank to six-month low amid rising wages and fuel costs and end of stamp duty holiday

Waiters serve people eating and drinking at outside tables on Saturday evening, April 24, 2021, in Soho, central London, following the further easing of lockdown coronavirus restrictions in England. (Dominic Lipinski/PA via AP)
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Britain’s economic recovery lost more momentum than expected in August, as staff shortages, supply chain challenges and the end of the stamp duty holiday stunted activity in the country’s services sector.

The IHS Markit/CIPS UK Services Purchasing Managers' Index (PMI), considered a good gauge of economic health, fell to 55 in August, down from a preliminary "flash" reading of 55.5 and much lower than the 59.6 recorded in July, leading to the worst month for business activity growth since the recovery began in March.

Meanwhile, composite PMI, which combines the services and manufacturing sectors, fell to 54.8 in August, lower than a flash estimate of 55.3, and sharply down from the 59.2 recorded in July

While both readings are well above the 50 mark, which separates growth from contraction, overall UK economic growth slowed over the summer, the survey shows.

Tim Moore, economics director at IHS Markit, said the service sector lost momentum for the third consecutive month as the impact of looser pandemic restrictions faded in August.

“Many businesses suffered constraints on growth due to staff shortages, self-isolation rules and stretched supply chain capacity,” Mr Moore said.

Increases in labour costs and fuel bills as well as greater transport costs were the main drivers of higher business costs with 44 per cent of those surveyed pointing to higher expenses.

But service providers also signalled the sharpest rise in employment since data collection began 25 years ago, as businesses sought to rebuild their Covid-battered workforce in response to improved sales.

The competitive labour market conditions led to steep wage pressures during August, with survey respondents observing long wait times to fill vacancies and an unexpectedly high staff turnover as the UK economy reopened, Mr Moore said.

A separate survey on Friday showed employers were still hunting for more staff than before the pandemic, adding to signs of a tight labour market following the cycle of lockdowns and Britain’s exit from the European Union.

The economy will be plagued by labour shortages and potential supply chain disruption for years to come, according to the Recruitment & Employment Confederation, with the food, logistics and hospitality sector in particular struggling to secure employees before the crucial Christmas period.

REC’s jobs tracker showed there were almost 1.7 million active job advertisements in the UK during the final week of August with demand for workers continuing to rise amid shortages.

Meanwhile, new business volumes eased from the month before with businesses also blaming the end of the stamp duty holiday, which led to a slowing property market as the tax break on home purchases was partially withdrawn.

Lower export orders, a lack of tourists owing to the UK’s travel restrictions and Brexit trade frictions also dampened growth.

Supply chains are on the edge in the UK amid global shipping delays, a lack of raw materials and a chronic shortfall of lorry drivers.

Duncan Brock, group director at the Chartered Institute of Procurement & Supply, said the third consecutive monthly fall in growth in the services sector showed that a lack of staff and raw materials in August continued to rein back on recovery after the spring surge.

"With the third monthly fall in a row, new order growth failed to impress and work from overseas barely rose. Brexit continued to make its mark and supply shortages and logistics difficulties will pile on the pressure in the coming months, but service companies remained buoyant about future opportunities," Mr Brock said.

Meanwhile, eurozone business activity stayed robust last month, despite concerns about the spread of the coronavirus Delta variant and widespread supply chain issues.

IHS Markit's final composite PMI dropped to 59 last month from July's 15-year high of 60.2, still well above the 50 mark separating growth from contraction but slightly below a 59.5 flash estimate.

"It was another solid result for euro area businesses in August," said IHS Markit senior economist Joe Hayes.

"Another strong quarter-on-quarter rise in GDP [gross domestic product] is on the cards for the third quarter, and we're certainly on track for the eurozone economy to be back at pre-pandemic levels by the end of the year, if not sooner."

However, ongoing supply chain disruptions caused the cost of raw materials to soar again in August, while eurozone inflation surged to a 10-year high of 3 per cent in August with further rises likely.

Updated: September 03, 2021, 10:21 AM