Stagflation fears as UK economy cools

Supply chain woes and surging energy prices have seen business activity drop to seven-month low

The UK PMI index for manufacturers plunged by 4 percentage points to 56.3, a far steeper decline than expected. Bloomberg

Britain’s private sector lost more momentum in September as supply chain issues and surging energy prices added to fears the economic recovery is entering a period of stagflation.

The IHS Markit/CIPS Flash Composite Purchasing Managers' Index, a good gauge of economic health, dropped for a fourth consecutive month in September to its lowest reading since February, slipping to 54.1 from 54.8 in August.

September's loss of momentum was most noticeable in the manufacturing sector, where demand softened and shortages of staff and materials stunted output, with factories and services firms raising prices aggressively to pass on the soaring cost of wages, products and transportation.

“The September PMI data will 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,” said IHS Markit’s chief business economist Chris Williamson.

"While there are clear signs that demand is cooling since peaking in the second quarter, the survey also points to business activity being increasingly constrained by shortages of materials and labour, most notably in the manufacturing sector but also in some services firms."

While the PMI reading is still above the 50-point threshold that separates growth from contraction, manufacturing production only rose modestly amid severe supply chain disruption and signs of softening demand, indicating a period of stagflation was on the horizon - where the economy stagnates amid rising prices and stalling growth.

The PMI index for manufacturers plunged by 4 percentage points to 56.3, a far steeper decline than expected, while a lack of staff and components hindered the food, drink and vehicle manufacturing sectors, with backlogs of work building up and supplier delivery times lengthening.

The PMI for the services sector also dipped in September, falling to 54.6 from 55.0 in August, its lowest level since February when Britain was still in lockdown.

Business expectations among services companies fell to a nine-month low and they raised prices on the broadest basis since records started in the mid-1990s.

"Brexit was often cited as having exacerbated global pandemic-related supply and labour market constraints, as well as often being blamed on lost export sales," Mr Williamson said.

Meanwhile in the eurozone, business activity grew at its weakest pace in five months in September as Covid-19 restrictions to limit the Delta variant of the coronavirus hit demand and supply-chain constraints pushed input costs to a more than two-decade high.

IHS Markit's Flash Composite PMI for the economic bloc fell to a five-month low of 56.1 in September from 59.0 in August.

"September's flash PMI highlights an unwelcome combination of sharply slower economic growth and steeply rising prices," said Mr Williamson.

"Growth looks likely to weaken further in coming months if the price and supply headwinds show no signs of abating, especially if accompanied by any rise in virus cases as we head into the autumn."

A sub-index tracking input costs hit 70.5, its highest in more than two decades, suggesting supply distortions - one of the primary drivers of prices across the globe in recent months - are far from resolved and the trend of higher inflation is here to stay, at least for now.

Meanwhile, a PMI covering the bloc's dominant service industry fell to 56.3 in September from 59.0 in August, its lowest since May.

Growth in the eurozone is moderating from what was an exceptional pace a few months ago facilitated by the easing of public health restrictions, said Ricardo Amaro, senior economist at Oxford Economics.

"Declines in the more forward-looking indicators chime with our assessment that eurozone GDP growth is set to moderate further in Q4 to 1 per cent quarter-on-quarter, down from 1.8 per cent in Q3," Mr Amaro said.

"Supply delays and shortages and higher prices were important factors behind the decline in future sentiment to its lowest level since January 2021, consistent with our assessment that supply bottlenecks will remain an important headwind for eurozone growth in the months ahead."

However, S&P Global Ratings was more optimistic, revising its eurozone growth forecast up for 2021 to 5.1 per cent from 4.4 per cent, on signs the economy was rebounding faster than expected.

"The rebound of the European economy since restrictions were lifted in March/April has been surprisingly strong, both in terms of GDP (gross domestic product_ and employment," said S&P Global Ratings senior economist Marion Amiot.