Business

UK economy surges but analysts warn boom could be short-lived

Britain’s economy surged ahead in June as private-sector businesses secured extra work and created thousands of new jobs, but analysts warned the boom could be short-lived if shortages of skilled staff and hold-ups to vital supplies continue into the autumn.

The manufacturing and services industries, which account for more than 80% of business activity, expanded at near-record rates in June, according to a survey by IHS Markit, building on the unprecedented burst in output growth in May.

were in a confident mood after the easing of Covid-19 restrictions and a rush by consumers to shop and visit bars and restaurants.

Before the Bank of England’s meeting on Thursday to assess the economy and decide whether interest rates should increase, it was clear from respondents that businesses were enjoying higher domestic sales and higher demand from the US, China and much of Europe for British goods and services.

The IHS Markit/CIPS flash UK output index measures the difference between the proportion of employers who say activity is above or below normal levels, where a figure of 50 separates contraction from expansion. The composite index was 61.7 in June, while the manufacturing sector posted a 64.2 figure, and the services industry stood at 61.7.

However, there were warning signs that the strength of the recovery could wane after a slight fall in the composite index reading from May’s record of 62.9.

Surveys of business activity across Europe were mixed in June after France recorded a weakening of service industry activity while German services business made gains. Economists said the uneven recovery was likely to depress sales.

Chris Williamson, the chief business economist of IHS Markit, said: “There are some signs that the rate of expansion appears to have peaked, as both output and new order growth cooled slightly from May’s record performances.”

He warned that firms could be forced to push up prices as their capacity to increase production to meet growing demand was constrained by supply hold-ups and staff shortages.

“Inflation worries have continued to intensify. Record levels of the survey’s price gauges and the further development of capacity constraints hint strongly that consumer price inflation has much further to rise after already breaching the Bank of England’s 2% target in May.”

Suppliers have struggled to meet demand for components and raw materials since the reopening of much of the world economy this year, while delays at UK ports related to new trade arrangements with the EU have also played a role.

“Although businesses also reported a record increase in employment during June, many firms continued to report a lack of capacity to meet the recent surge in demand, often due to staff and supply shortages,” he said.

“The survey also found growing evidence of labour shortages feeding through to higher wage costs, which could add to worries that the recent spike in inflation could prove stickier.”

Kieran Tompkins, an economist at the consultancy Capital Economics, said the UK’s purchasing managers’ index reading suggested that the monthly rises in GDP would ease back from the 2.3% recorded in April.

He said the increase in input costs in the index to 71.6, just shy of a record high, could partly be due to wage pressures. “And these costs are being passed on as output prices rose to a record high of 58.1,” he added.

The Bank of England’s monetary policy committee meets on Thursday following a steep rise in the rate of inflation to 2.1%.

Most analysts believe annual price rises will peak at about 3% before falling back next year, though economists at the Resolution Foundation thinktank said the UK was more likely to follow the same trajectory as the US, where inflation has already reached 5%. The foundation said UK inflation was likely to 4% by the end of the year.

 

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