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'Pingdemic' & Inflation Trigger Sharp Slowdown in the Economic Rebound: PMI Data

Empty shelves

Above: Self isolating workers means some supermarkets are struggling to restock. Image: Adobe Images.

The UK economy is still growing at a health clip, but that rate of growth has slowed more sharply than investors had expected according to new data.

A survey of UK businesses conducted by IHS Markit shows businesses recorded robust growth in July, although shortages of staff and materials hindered the recovery in July.

The IHS Markit Manufacturing PMI read at 60.4 in July, down on the 62.7 reading the consensus was expecting and 63.9 reported in June.

The Services PMI read at 57.8, disappointing against the 62.0 the market expected and the 62.4 reported in June.

The Composite PMI - which weights the Services and Manufacturing readings according to each sector's share of the economy - read at 57.7, lower than the market had expected at 61.9 and lower than June's reading of 62.2.

PMI 2

The Pound is in the red against the Euro and Dollar at the time of publication, but a look at the charts shows there was no notable reaction to the release of the PMI data, suggesting selling pressures have roots elsewhere.

“Sterling has sat firmly at the bottom of the G10 pile this morning with losses exceeding 0.25% against the dollar. While the rest of the G10 has incrementally recovered against the greenback over the course of the morning, sterling’s price action has been sluggish. The pound’s bearish bias today was confirmed by this morning’s release of preliminary PMI data for July, which saw the speed of the recovery moderate to its weakest level since March,” says Simon Harvey, Senior FX Market Analyst at Monex Europe.

Nevertheless, the data serves as confirmation that the UK's economic rebound has slowed sharply amidst rising inflation, worker shortages and Covid-19 infections.

Although the economy is effectively fully open hundreds of thousands of people are in self isolation having been instructed to do so by the NHS Test and Trace application.

This is colloquially referred to by the media as the 'pingdemic'.

With the country in the midst of a third wave of infections consumer and business confidence has understandably taken a hit, and this is reflected in the data.

"The speed of recovery was the weakest since March, with survey respondents widely reporting staff and raw material shortages due to the pandemic," says IHS Markit in a statement.

The survey finds concerns about the loss of momentum contributed to the lowest degree of optimism towards the business outlook for nine months.

"The lower UK services PMI is consistent with what we're seeing in other high-frequency numbers. Delta has paused the recovery for now, though we're still probably looking at positive third-quarter growth," says James Smith, Economist at ING.

To be sure, slowing growth is not contracting growth and the PMI readings remain historically strong.

The report finds around 32% of the survey panel indicated a rise in business activity during July, compared to 16% that signalled a decline.

Growth was attributed to looser pandemic restrictions, a boost to consumer spending from staycations, rising demand for business services, and strong order books in the manufacturing sector.

Those signalling a drop in output mostly commented on severe shortages of raw materials and the impact of COVID-19 isolation on staff availability (some also cited extended absences as employees took up unused holidays).

PMI July 2021

The latest rise in new work was the slowest in the current five-month period of expansion.

The report shows businesses cited a drop in business and consumer confidence due to the pandemic situation, while others continued to report Brexit-related difficulties with export sales.

Furthermore, difficulties recruiting staff was found to be a key factor holding back efforts to boost business capacity.

"Acute material and staff shortages in certain sectors interrupted the rhythm of recovery in private sector business as signs of malaise crept in affecting output, new orders and business optimism," says Duncan Brock, Group Director at CIPS.

Inflationary pressures are also exceptionally high with firms reporting their costs rose at a rate unprecedented in over 20 years of survey history as supply shortages pushed up the price of goods, suppliers of services hiked prices and employee pay continued to rise.

This finding should be of particular concern to those members of the Bank of England's Monetary Policy Committee who remain of the view that elevated levels of inflation will prove temporary.