Has inflationary pressure started impeding UK economic rebound?

Summary

  • The IHS Markit economic survey reported a preliminary June reading of 61.7, falling slightly from May’s reading of 62.9.
  • The marginal drop in data indicated that the UK’s frenzied economic growth rate might have peaked due to labour shortages and supply chain constraints, thus increasing inflationary pressures.
  • The Bank of England’s monetary policy decision set to be announced on 24 June

The UK’s private sector economic activity survey, the IHS Markit flash UK Services Business Activity registered a preliminary reading of 61.7 in June, it is among one of the highest growth rates since the economic survey started in 1998. It had previously touched a high of 62.9 in May.

The IHS Markit and CIPS UK Manufacturing Purchasing Managers’ Index (PMI) registered a reading of 64.2 in June, compared to 65.6.

What caused the PMI to fall slightly?

However, the June reading indicates that while businesses are trading at high levels following the easing of restrictions, constraints such as staff shortages and challenges in the supply chain have begun to put inflationary pressure on growth.

The PMI for the manufacturing sector is reported between 0 to 100, with any figure above 50 indicating growth.

Non-essential retail and outdoor dining had reopened in mid-April, while in-door dining in the hospitality sector resumed operations in mid-May, as part of the UK’s lockdown phaseout roadmap.

However, the final lockdown easement was pushed back by the UK PM from 21 June to 19 July amid rising cases of the delta variant of the coronavirus.

Also Read: UK Manufacturing PMI Displays A Record Surge in May

Possible peak in growth rate

The unprecedented growth in the private sector had led to a boom in employment, with the UK reporting the highest level of employment.

However, according to IHS Markit’s chief business economist, Chris Williamson, there were some signs signalling growth in the UK economy that may have peaked following the initial boom due to a lack in capacity to meet the surge in staff requirements and supply chain constraints.

Williamson added, there was increasing evidence of staff shortages causing wage costs to rise, thus adding to concerns that the recent uptick in inflation could prove to be stickier than previously anticipated.

He also added that while both output and new order growth slowed slightly from the record highs reported in May’s data, full order books seen by businesses and a further easing of pandemic related restrictions signalled that the economy’s expansion rate would remain strong through the summer months.

The UK’s headline inflation rate in May rose above the central bank’s target of 2 per cent, coming in at 2.1 per cent. The inflation data thus hit a two-year high.

Monetary policy stance

The PMI data comes ahead of the UK central bank, the Bank of England (BoE) interest rate setting decision slated to be announced on 24 June. However, the BoE is not expected to change its monetary policy stance, having previously called the spike in inflation transient in nature.

Also Read: What is PMI and why is it important?


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