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The underlying trend in the pace of UK economic growth likely
slowed for a third successive month in August. Although some
sectors such as consumer services have rebounded from a surge in
COVID-19 case numbers, other parts of the economy are struggling
amid weaker demand growth and shortages of inputs and workers.
UK economic growth slowed sharply in July despite the economy
being further opened up from COVID-19 related restrictions. GDP
rose just 0.1% on the prior month, according to the latest official
data from the ONS.
Even in the best of times, caution should be used in
extrapolating any signals from one month's data, and the volatility
in economic activity caused by the pandemic means the recent data
have been especially volatile. July's near stalling, for example,
followed a 1.0% surge in GDP during June.
Some of this 'noise' can be removed by looking at the growth
trend as indicated by the three-month-on-three month moving average
growth rate, which fell to 3.6% in July, down from a recent peak of
4.8% in June. Importantly, IHS Markit/CIPS PMI data, available up
to August, point to this trend growth rate weakening further
mid-way through the third quarter. A weighted average of the PMI
output index covering manufacturing, services and construction,
fell for a third straight month in August, dropping to its lowest
since February.
UK data indicate supply and labour
constraints
Like the GDP data, the PMI had shown consumer services
struggling in particular amid rising virus infection numbers as the
Delta wave spread across the country. Encouragingly, the PMI data
for August indicated that growth in consumer-facing sectors revived
strongly. However, growth deteriorated in other parts of the
services economy in August, notably across the vast business and
financial services sectors, suggesting that - measured overall -
services acted as a bigger drag on the economy in August.
The PMI survey also showed manufacturing output and construction
industry growth deteriorating further in August, linked in many
cases to activity being constrained by supply shortages,
exacerbating a broader labour shortage problem which appears to
have increasingly hit more parts of the economy in recent
months.
The latest
recruitment industry survey, conducted by IHS Markit for REC
and KPMG, showed staff availability to have deteriorated at a rate
far exceeding anything seen in the survey's prior 23-year history
in August, with salaries rising at a record pace as firms fought
for workers via increased pay rates.
Inflation implications
While the accelerating pay growth will fuel concerns among
policymakers that inflation could rise further in coming months, an
overriding concern is likely to be the potential further weakening
of growth in the economy, as supply constraints limit expansion
while demand growth cools from the post-lockdown rebound seen in
the second quarter. With workers now also facing a 1.25% tax hike,
many policymakers may wish to see more data before pushing for any
withdrawal of monetary stimulus.
Chris Williamson, Chief Business Economist, IHS
Markit
Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.
