UK recovery 'on pause' as Delta variant rips through

·3-min read
A workers explains to the media the manufacturing process used for the production of the Nissan Leaf battery at the Envision AESC UK Ltd battery plant based at Nissan in Sunderland. The Japanese car giant Nissan has announced that they are to build a new electric model and huge battery plant in the UK in a massive boost to the automotive industry. Picture date: Thursday July 1, 2021. More than 1,600 jobs will be created in Sunderland and an estimated 4,500 in supply companies under an investment of �1 billion.
Although business activity continued to grow thanks to an easing of lockdown restrictions, the rate of expansion slowed sharply to the weakest since March. Photo: PA

UK’s private sector growth was at a four-month low, hit by shortages of staff and materials, new data has revealed, and optimism for the future is at its lowest since October 2020.

July’s purchasing managers' index (PMI) data by IHS Markit and Chartered Institute of Procurement & Supply "dipped noticeably in July, offering another hint that the recovery is effectively on pause as COVID-19 cases rise," said a note by ING.

At 57.7 in July, the Flash UK Composite Output Index was down from 62.2 in June and the lowest since the easing of lockdown restrictions began during March.

PMI above 50 represents an expansion when compared with the previous month. A reading under 50 represents a contraction.

Manufacturing PMI was at 60.4, down from 63.9 in June, well below expectations of 62.4. Services PMI fell from 62.4 last month to 57.8 this month.

"July saw the UK economy’s recent growth spurt stifled by the rising wave of virus infections, which subdued customer demand, disrupted supply chains and caused widespread staff shortages, and also cast a darkening shadow over the outlook," said Chris Williamson, chief business economist at IHS Markit.

Although business activity continued to grow thanks to an easing of lockdown restrictions, the rate of expansion slowed sharply to the weakest since March.

Transport, hospitality and other consumer-facing services companies were the hardest hit, and manufacturing also saw growth weaken significantly.

The July flash survey only covered three days of the full easing of COVID restrictions, but Williamson believes “imminent re-acceleration of growth in August looks unlikely” based on these numbers.

Concerns over the Delta variant have overshadowed “freedom day” (19 July) when all restrictions came to an end, and were a key factor alongside Brexit and rising costs behind a sharp slide in business expectations for the year ahead.

Read more: FTSE rises as Euro 2020 gives UK retail sales a boost

Firms’ costs have also risen at an unprecedented rate, the report said, as supply shortages pushed up the price of goods, suppliers of services increased prices and employee pay continued to rise.

Around 32% of the survey panel indicated a rise in business activity during July, compared with 16% that signalled a decline.

Where growth was reported, this 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 were facing shortages of raw materials and the impact of COVID-19 isolation on staff availability.

Looking forward, survey respondents reported concerns about the enduring impact of the pandemic, especially in relation to staff availability, while some manufacturers noted a natural slowdown as customers had brought forward orders due to supply shortages.

"Broadly speaking, the decline in business activity was due to moderating new order growth and input shortages, especially in the manufacturing sector, along with concerns over the health backdrop," said Simon Harvey, senior FX market analyst at Monex Europe.

"It now looks like the period of above-60 PMI prints is behind us as the economic recovery matures and renewed health concerns weigh on both domestic and global demand."

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