Business activity in the UK hit a three-month high in October, outstripping earlier estimates and indicating that the economy remains on an upward trajectory ahead of a crucial Bank of England decision on interest rates.
The IHS/Markit composite purchasing managers’ index was 57.8 last month, up sharply from the 54.9 recorded in September and above the earlier “flash” reading of 56.8 for October. Any reading above 50 indicates the majority of respondents reported growth in activity.
The indications of continued growth suggested that the post-lockdown recovery remained robust in the face of increased Covid-19 cases and supply-side constraints.
But record rises in cost pressures highlighted the risks of post-lockdown expansion and could put pressure on the BoE to raise interest rates at Thursday’s Monetary Policy Committee meeting.
October’s increase was driven by services, where reported activity rose to 59.1, the highest reading since July, and surpassing previous estimates and the 55.4 recorded in September. Survey respondents noted rising business and consumer spending in the services sector, and a recovery in new work from abroad.
Duncan Brock, group director at the Chartered Institute of Procurement and Supply, said the rise was driven by domestic markets but also export orders increasing to the highest level since 2018 as travel opportunities opened up.
“The dominant service sector in the UK economy had a surprisingly good month in October with a strong uptick in overall output, job creation and new orders as business and consumers began to spend again unfettered by lockdown and pandemic restrictions,” he said.
But booming services activity widened the gap between the sector and manufacturing, which lagged thanks to supply chain disruption and severe shortages of materials — problems that respondents identified as looming concerns across the economy.
Rising costs for energy, fuel and raw materials drove price increases, and reported input cost inflation from survey respondents reached a record high. About 59 per cent of respondents reported an increase in average costs in October compared with 15 per cent last year.
“Evidence of momentum in services activity went hand-in-hand with more signs of burgeoning cost pressures,” Martin Beck, senior economic adviser at the EY Item Club, said. “Costs were pushed up by supply-chain challenges and higher wages as companies responded to a shortage of staff.”
Tim Moore, economics director at IHS Markit, said survey respondents were concerned about prolonged staff shortages and the effects of supply chain disruption on growth.
“Record rates of input price and output charge inflation appear to have dampened business optimism, which eased to its lowest since January,” he said.
While fast expansion and increased costs will add to pressure on the Bank of England to raise interest rates, Beck said he expected the MPC to “stick with a ‘wait-and-see’ approach” on the “knife-edge” decision.
“Further evidence of inflationary pressures will no doubt be noted by those MPC members considering voting for a rise in bank rate,” he said.
“But those pressures still look predominately to be the result of the adjustment pains of an economy emerging from hibernation, which should give pause for thought.”
Source: Economy - ft.com
