UK sees 'fastest output growth on record' but cost pressures rise

A closely-watched survey of business activity has shown its best reading on record as a vaccine-driven reopening of the economy gets into gear.

The IHS Markit/CIPS flash composite Purchasing Managers’ Index (PMI) for May, which covers both manufacturing and services and is updated later in the month, credited a surge in growth and employment to the gradual unlocking of COVID-19 restrictions.

It gave a combined reading of 62.0 – comfortably above the 50 mark separating growth from contraction and the best score since the composite measure first surfaced in January 1998.

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“Looser pandemic restrictions and high levels of pent up demand meant that a swift turnaround in labour market conditions continued in May, with private sector employment rising at the quickest pace since June 2014,” the report said.

However, it sounded a note of caution on inflation – as consumer prices already surge at the fastest rate for more than a decade – warning that cost pressures for businesses were at their highest level for 13 years.

The growth element of the survey adds to evidence that activity has shot up since March, though it was not enough to prevent gross domestic product (GDP) tumbling by 1.5% in the first quarter.

The Bank of England forecast earlier this month that the UK economy would see its strongest growth this year since 1941 – a historic bounce back from the worst slump in more than 300 years during 2020 as the pandemic struck.

The PMI data suggested hotels, restaurants and other previously closed consumer services saw the strongest jump in demand during May.

It does not cover the retail sector but official sales figures, released separately on Friday, bolstered the case for a second quarter fightback as they revealed a 9.2% surge as high street shops reopened in April.

The chief threat to activity could come from rising inflation as a surge in living costs risks choking affordability.

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The Bank’s governor, Andrew Bailey, said earlier this week that policymakers were yet to see evidence of rises in prices paid by manufacturers feeding through into consumer prices.

Instead, he believes inflation can currently be linked to “transitory” shifts as the economy unlocks.

The Bank, which has an inflation target of 2%, could move to curb a predicted surge in inflation beyond its target through an interest rate rise, or rises, but raising borrowing costs could do more harm than good to the overall recovery.

The PMI noted on Friday: “Manufacturers mostly commented on price pressures due to shortages of raw materials and high shipping costs, while service providers often noted increased staff salaries.

“Strong customer demand helped to confer a greater degree of pricing power to private sector businesses in May, as signalled by the strongest rate of output charge inflation since this index began nearly 22 years ago.”

It is an issue that is casting a cloud across western economies.

But Samuel Tombs, chief UK economist at Pantheon Macroeconomics, saw little reason for the Bank to worry.

He wrote: “With labour market slack likely to increase later this year when the furlough scheme is wound down and COVID-related costs set to diminish as the country exits the pandemic, we continue to think that the MPC (monetary policy committee) will look through the upcoming bout of above-target CPI inflation.”

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