UK economic recovery continues but inflationary pressures build - PMI

The IHS Markit flash UK composite output index was 61.7 in June. That was down on May’s final reading of 62.9, and was marginally below consensus for 61.5. But it remains among the fastest rates of expansion seen since the series began in January 1998.

The services business activity index was 61.7, compared to 62.9 in May, while the manufacturing PMI printed at 64.2 against May’s 65.6. The manufacturing output index was 62.0, one point lower than May’s 63.0 reading.

IHS Markit said companies had responded to rising workloads by hiring extra staff “at an unprecedent rate”. The composite employment index hit a record high of 58.5 in June, up on May’s 57.4.

But it also noted input costs and output prices had reached fresh highs, as supply-chain disruptions weighed heavily.

Chris Williamson, chief business economist at IHS Markit, said: “Businesses are reporting an ongoing surge in demand in June as the economy reopens, led by the hospitality sector, meaning the second quarter looks to have seen economic growth rebound sharply from the first quarter’s decline.

“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 performance, but full order books and a further loosening of virus-fighting restrictions should nevertheless help ensure growth remains strong as we head through the summer.”

Duncan Brock, group director at the Chartered Institute of Procurement and Supply, said: “As materials were increasingly hard to come by, they once again became more expensive. Record cost inflation last seen in 2008 filtered through to increasing output costs, as manufacturers were unable to absorb these rapid rises any longer.

“In service businesses, consumers were hit with considerably-higher prices for food and hospitality, increasing the threat of soaring inflation in the UK economy this summer.”

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “The PMIs remain one of the most upbeat indicators of the pace of the economic recovery, insofar as they signal only a modest slowdown in month-to-month GDP group in June. Other surveys, however, point to a sharper deceleration.

“The further rise in the composite output price index, to 60.6 – the highest level in its 23-year history – confirms that price pressures are building quickly. Nonetheless, with labour market slack likely to increase in the fourth quarter, when the furlough schemes is wound down, and Covid-related costs to diminish as the country exits the pandemic, we continue to think that the MPC will look through the upcoming bout of above-target CPI inflation.”

Joshua Mahony, senior market analyst at IG, said: “While both manufacturing and services PMI readings weakened in the UK, there are many aspects to be encouraged by, with employment continuing to remain buoyant, and the 12-month outlook remaining optimistic.”

IHS Market surveyed its panel of 650 manufacturers and 650 service providers between 11 and 21 June. Final data will be published by 5 July.