Booming business across Europe fuels inflationary pressure

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Businesses across Europe are experiencing the largest increases in orders and activity for many years, creating growing supply shortages and driving up prices, according to a closely watched survey.

Eurozone business activity expanded at the fastest rate for 15 years in June after lockdown measures were lifted, while UK business activity also remained buoyant, according to the IHS Markit purchasing managers’ index published on Wednesday.

IHS Markit’s flash eurozone PMI rose to 59.2 in June, up from 57.1 in May, its highest level since June 2006 and well above most economists’ expectations. A reading over 50 indicates a majority of businesses reported an expansion from the previous month. 

Germany’s PMI hit a decade high of 60.4, while France’s PMI inched up to 57.1. The UK interim PMI was 61.7, lower than the record 62.9 reported in May but among the highest since the series began in 1998.

The survey results suggest that Europe’s main economies will record a strong rebound in the second quarter from their historic pandemic-driven contractions over the past year. They confirmed the readings from recent high-frequency data showing consumers in Europe are flocking back to bars and restaurants, booking holidays and travelling to work again.

“The [eurozone PMI] data set the scene for an impressive expansion of [gross domestic product] in the second quarter, to be followed by even stronger growth in the third quarter,” said Chris Williamson, chief business economist at IHS Markit.

Line chart of Purchasing managers' index showing Eurozone business activity rises at fastest pace since 2006

Nadia Gharbi, an economist at Pictet Wealth Management, said: “It is boom time for eurozone businesses, even if it is not so much the level of the PMIs that matter but the direction.”

However, building inflationary pressures are becoming more of a problem as manufacturing and services companies said they were passing on higher input costs to customers at an unprecedented rate.

IHS Markit said eurozone businesses reported the biggest increase in their backlogs of work since data collection began in 2002, as supply problems spread from manufacturing to the services sector, where backlogs rose at the fastest rate in more than 20 years.

It was a similar picture in the UK, where input cost inflation rose for the fifth month in a row, equalling its previous highest pace on record, and output price inflation touched an all-time high for the second successive month.

Williamson predicted “further upward pressure on inflation in the coming months”, adding that many companies were “struggling to meet demand, suffering shortages of both raw materials and staff”.

Inflation has already topped the targets of both the European Central Bank and the Bank of England, at 2 per cent in the eurozone and above that in the UK. But both central banks have said they expect price pressures to be temporary and to fade next year.

Services businesses in the bloc reported a particularly strong rebound in activity and “higher supplier prices, increased fuel and transport costs, plus rising wage pressures”, IHS Markit said. Prices charged for goods and services “rose at an unprecedented rate”.

But in Germany there were indications that the supply chain problems could be easing after “a slight fall in the number of businesses reporting longer lead times on materials and components”.

According to the IHS Markit survey, the rapid expansion in activity drove companies in the UK to hire workers at the fastest rate in the data series’ history, while eurozone companies added extra staff at the highest rate since August 2018.

Jack Allen-Reynolds, economist at Capital Economics, said: “The demand for labour has suddenly shot up as large parts of the economy have opened at once, and this was never going to be an easy process.”

The flash PMI surveys are published around 10 days before the final PMIs, and typically include about 80 per cent of total responses.

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