UK economy continues roaring back – but momentum may have peaked

·Senior City Correspondent, Yahoo Finance UK
·3-min read
Supporters celebrate at the final whistle at the 4TheFans fan park in Manchester on Tuesday after England beat the Czech Republic 1-0 to finish top of their group in the Euros
Supporters celebrate at the final whistle at the 4TheFans fan park in Manchester on Tuesday after England beat the Czech Republic 1-0 to finish top of their group in the Euros. Photo: Anthony Devlin/Getty Images

The UK economy continues to roar back as COVID restrictions ease, new data suggests, but pressure on the bounce-back is growing as businesses battle staff shortages and supply chain issues.

A closely watched private sector survey of economic activity published on Wednesday morning showed businesses are still firmly in expansion mode. A separate survey by the Institute of Directors found confidence among its members was at an all-time high.

IHS Markit's (INFO) "flash" purchasing managers' index (PMI) for June registered 61.7 for Britain's economy.

PMIs are given on a scale of 0 to 100. Anything above 50 signals growth, while below means contraction.

June's numbers were slightly below May's blockbuster reading but still one of the best months for private-sector growth since the PMI survey began in 1998.

"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 very sharply from the first quarter’s decline," said Chris Williamson, chief business economist at IHS Markit.

June's "flash" PMI for the manufacturing sector was 64.2 and 61.7 for the dominant services sector. The services reading was slightly worse than City forecasts, while the manufacturing number was slightly better. 

Economies across Europe have posted bumper growth numbers since restrictions began easing over the past few months. In the UK, non-essential retail and outdoor dining was allowed to resume from mid-April and indoor locations such as pubs and bars were reopened in May. 

Read more: FTSE 100 rises on fifth anniversary of Brexit vote

IHS Markit said the relaxation of restrictions had created a hiring boom in the UK, with the strongest level of job creation since its records began. 

However, the boom is putting strains on the economy. Williamson said there were staff shortages in some sectors and mounting inflation pressures caused by supply chain issues.

"There are some signs that the rate of expansion appears to have peaked," he said. "Although businesses also reported a record increase in employment during June, many firms continued to report a lack of capacity to meet the recent surge in demand, often due to staff and supply shortages."

Inflation blew past the Bank of England's 2% target in May and Williamson said there was "growing evidence of labour shortages feeding through to higher wage costs, which could add to worries that the recent spike in inflation could prove stickier".

The Institute of Directors found concerns about inflation were also rising among its members. 

"Debt, repayments, and supply chain bottlenecks are putting pressure on firms to raise prices," said Tej Parikh, chief economist at the Institute of Directors. "Many businesses are also struggling to fill vacancies with the pandemic and Brexit making certain skills harder to find."

Momentum in June comes despite the push-back of the UK's so-called "freedom day" when all legal restrictions were due to be lifted. Prime minister Boris Johnson delayed the final stage of reopening from 21 June to 19 July to allow more time for vaccinations. Economists say the delay is likely to prolong economic recovery, rather than meaningfully alter it in any way.

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