Strong economic growth in the UK; War in Ukraine leads to higher prices and undermines business confidence

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UK PMI surveys indicated a robust and sustained pace of expansion in March as the continued reopening of the economy following COVID-19 containment measures helped offset wartime headwinds in Ukraine , Brexit and rising prices. However, the outlook has darkened as worries over the Russian invasion have exacerbated existing worries about soaring prices, supply chains and slowing economic growth. Business expectations are now at their lowest in almost a year and a half, pointing to a marked slowdown in the pace of economic growth in the months ahead.

Meanwhile, price pressures have increased due to higher energy and commodity prices resulting from the invasion. While the month of March saw by far the strongest increase in the selling prices of goods and services ever recorded by the survey, consumer price inflation is expected to increase further in the coming months.

Survey indicators point to a potentially marked slowdown in growth in the coming months, accompanied by a further acceleration in inflation and a deepening cost of living crisis, which paints an unwelcome picture. of “stagflation” for the economy in the coming months.

Current UK PMI and expected output

Current UK PMI and expected output

UK economy ends first quarter on a high note

The S&P Global/CIPS composite PMI recorded 59.7 in March, according to the preliminary “flash” reading, down only marginally from 59.9 in February to indicate a rate of expansion that is among the strongest on record in the world. course of the survey’s quarter-century history. Only two brief periods, namely the opening of the economy after the shutdowns in the second quarter of 2021 and the growth spurt seen in mid-2013, performed better in terms of output growth.

UK PMI and GDP

UK PMI and GDP

Service sector rebounds as economy opens, but factory growth slows

The past two months of strong growth contrast with a sluggish start to the year in January, when tougher COVID-19 health precautions hampered growth, especially in the services sector. With these restrictions now lifted, growth in the services sector has rebounded strongly to the fastest since June last year.

Growth in the services sector was driven by hotels and restaurants and other consumer services, where business activity accelerated amid the near-complete removal of pandemic containment measures. Business services also continued to grow at a strong pace, but growth weakened for financial services and the transport and communication sector, which recorded a fourth consecutive monthly decline.

It was a different story in manufacturing, however, where output growth faltered in March to its lowest level since last October, down sharply from February’s seven-month high.

Production by sector

Production by sector

The divergent growth rates between industry and services may be linked to different trends in order books. While new business entries in the services sector continued to grow very strongly – recording the fifth highest monthly increase in demand seen in the past seven years despite a decline in overseas sales, growth in New orders in the manufacturing sector fell to their lowest level in a year, on sluggish domestic sales and nearly stalled exports. In both sectors, companies reported a drop in demand for services due to the war in Ukraine. However, while in services this has been offset by the further opening of the economy, in manufacturing many companies are reporting lingering additional Brexit-related issues.

Order books by sector

Order books by sector

These diverging trends in new work inflows have in turn led to further divergence in backlogs by sector, which is an important indicator of how much work companies have on their books to maintain production and sales levels. employment in the months to come. Although backlogs increased in the service sector in March, backlogs in manufacturing fell for a second month.

Near-record job creation

Consistent with the diverging trend of accumulated backlogs, job creation in the service sector accelerated in March to one of the fastest rates ever recorded by the survey, but mass growth wage in the manufacturing sector has slowed.

Employment by sector

Employment by sector

However, despite the slowdown in factory employment growth, the overall level of employment reported by the survey remained very robust by historical standards. With the exception of the surge in hiring seen after the 2021 shutdowns, the March job gain has not been surpassed since comparable survey data became available in 1998.

Jobs vs Labor Force Survey Jobs

Jobs vs Labor Force Survey Jobs

Supply delays fall to lowest level in 17 months

The March survey also showed an easing of supply constraints, with the net number of manufacturers reporting delays falling to the lowest since October 2020. However, material prices continued to rise sharply, the rate of inflation accelerating in March. Many supply lines remained disrupted – made worse by China’s latest lockdowns and the war – giving pricing power to suppliers. Soaring energy prices have also increased business costs.

Manufacturing supply chains and input prices

Manufacturing supply chains and input prices

Unprecedented price increase

These higher costs have translated into higher selling prices in the manufacturing sector, although the rate of inflation remains below recent record highs. Sales price inflation in the services sector also accelerated, supported by input purchase costs, rising wage bills and soaring energy prices to the highest ever. recorded by the survey.

Sales price inflation by sector

Sales price inflation by sector

Measured across both sectors, the increase in selling prices of goods and services in March was well above any previous increase in the 25 survey years, and points to a further – potentially sharp – acceleration in inflation. consumer prices in the coming months.

PMI Selling Price and Consumer Price Inflation

PMI Selling Price and Consumer Price Inflation

War in Ukraine darkens business outlook

Anecdotal evidence from the survey revealed some initial impact from the war in Ukraine on current levels of production and demand, where there was a more noticeable impact on business confidence in the outlook. Expectations for future production have been cut to the lowest since October 2020 as concerns over the dispute have heightened existing concerns over Brexit, supply chains, prices and economic growth. Expectations for output growth over the coming year have fallen to the lowest since January 2021 in the manufacturing sector and the lowest since October 2020 in the services sector.

Future production expectations

Future production expectations

Original post

Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.

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