UK recovery slows due to staff shortages and supply chain issues

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UK business & economy updates

The UK’s economic recovery slackened in August as staff shortages and blockages in supply chains left businesses struggling to meet demand, a closely watched survey showed on Monday.

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 55.3 in August from 59.2 in July, undershooting analysts’ expectations and sinking to a six-month low.

The slowdown was evident in both services and manufacturing, although the survey readings were still above 50, showing the majority of companies reported an increase in activity over the previous month. There was strong optimism about the business outlook for the year ahead, supporting rapid hiring.

The services business activity reading fell to 55.5, from 59.6 in July, while the manufacturing PMI fell slightly from 60.4 to 60.1 — with a bigger drop seen in the sub-index for manufacturing output.

For manufacturers, the main problems were staff shortages due to both self-isolation and unfilled vacancies, with escalating shipping costs and shortages of raw materials fuelling price pressures. Supply constraints were the main reason sectors such as auto production and electrical goods had fallen into decline, IHS Markit said.

A separate monthly survey of manufacturers, published on Monday by the CBI employers’ group, painted a similar picture, with businesses reporting continued strength in orders, but a slowdown in output growth due to capacity constraints, with stock adequacy at its worst level in the 63 years the research has been conducted.

In the services sector, some businesses surveyed by IHS Markit said activity had weakened — for example in residential property after the end of the full stamp duty holiday — but most were more concerned about boosting staff numbers to rebuild capacity as the economy continued reopening.

“Supplier delays have risen to a degree exceeded only once before, in the initial months of the pandemic, and the number of companies reporting that output had fallen due to staff or materials shortages has risen far above anything ever seen previously in more than 20 years of survey history,” said Chris Williamson, chief business economist at IHS Markit.

Duncan Brock, group director at Cips, said the easing in activity served as a “stark warning . . . that the accelerated levels of growth we’ve seen earlier this summer are not sustainable”.

The data were collected between August 12 and 19, suggesting that staff absence and recruitment difficulties were still a constraint even after the worst of the “pingdemic” had passed, with cases of the Delta variant down from their July peak and the self-isolation rules relaxed on August 16.

Salomon Fiedler, economist at Berenberg bank, noted that the slowdown in growth was far more pronounced in the UK than elsewhere in Europe, with severe staff shortages holding back services output even more than concerns about Covid-19 infections.

Samuel Tombs, at the consultancy Pantheon Macroeconomics, said the surveys suggested that the economic recovery was “starting to be choked off by supply constraints”, but noted that growth in demand had also slowed, with goods export orders weaker than in the eurozone for an eighth consecutive month, reflecting Brexit’s impact.

This had made businesses less able to pass on cost increases to their customers, he said, with factory gate prices rising at the slowest rate since May.

“Despite the rebound in activity, ongoing disruptions could choke off future manufacturing growth,” said Alpesh Paleja, economist at the CBI, adding that the government should help smooth friction in supply chains until activity settled back to normal levels.

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