UK manufacturing recovery sees 'abnormally large slowdown' as supply chain and staffing issues bite

HGV lorries on the M4 motorway near Datchet, Berkshire. The Government has announced a temporary extension to lorry drivers' hours from Monday July 12th, amid a shortage of workers. Picture date: Thursday July 8, 2021.
Supply chain issues and staffing were blamed for slowing recovery in manufacturing. Photo: PA

The UK private sector saw a sharp slowdown in output during August, as companies reported constraints on activity due to staff shortages and supply chain issues.

IHS Markit and CIPS' latest PMI flash data showed that, despite these issues, efforts to rebuild capacity and strong optimism towards the business outlook contributed to the fastest rise in employment numbers since the index began in January 1998.

Nonetheless, backlogs of work increased for the sixth month in a row as businesses struggled to keep up with customer demand.

At 55.3 in August — down from 59.2 in July — the headline seasonally adjusted IHS Markit/CIPS Flash UK Composite Output Index dropped for the third month running.

The latest reading was still above the crucial 50.0 no-change threshold, but signalled the slowest expansion of output since the UK private sector returned to growth in March.

"An abnormally large slowdown in overall activity in August offers a stark warning to the UK economy that the accelerated levels of growth we’ve seen earlier this summer are not sustainable," said Duncan Brock, group director at CIPS.

"It was the slowest output expansion for six months, and the worst shortages of staff and materials on record are mostly to blame."

Weaker recoveries were seen in both the manufacturing and service sectors, with the latter recording the greatest loss of momentum since July.

"In our view, it is natural that economic growth would slow somewhat after the initial sharp V-shaped recovery we saw in recent months," said Willem Sels, chief investment officer of Private Banking and Wealth Management at HSBC.

"For equity markets, slower but still positive growth should still support UK stocks. But the outperformance of the FTSE 250 may come to a halt, as investors start to shift their preference from small and cyclical stocks towards the more diversified and resilient large caps in the FTSE 100.”

Analysis of comments provided by survey respondents suggested that incidences of reduced output due to shortages of staff or materials were fourteen times higher than usual and the largest since the survey began in January 1998.

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New order growth eased only slightly in August, with stronger export sales helping to cushion a slower recovery in domestic demand. Resilient new business volumes contributed to another accumulation of unfinished work, although the latest rise in backlogs was the weakest since April.

Markit said that inflationary pressures showed signs of easing in August, with input prices rising at the weakest pace for three months.

However, many firms commented on higher wages due to tight labour market conditions. Severe shortages of raw materials and critical components also continued to push up purchasing prices, with UK goods producers signalling the sharpest overall downturn in supplier performance since April 2020.

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