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U.K. Economy Shows Signs of Slowing as Covid Hits Supply Chains

An index based on a survey of purchasing managers fell unexpectedly to its lowest since March, IHS Markit said.

U.K. Economy Shows Signs of Slowing as Covid Hits Supply Chains
Dinging tables on the sidewalk outside Indian restaurants at Brick Lane in Hackney, London, U.K. (Photographer: Hollie Adams/Bloomberg)

Britain’s economy showed signs of slowing in July as euphoria following the easing of coronavirus restrictions eased and a resurgence of the coronavirus caused widespread staff shortages.

An index based on a survey of purchasing managers fell unexpectedly to its lowest since March, when most stores and restaurants were still shut, IHS Markit said on Friday. The findings contrast with official government statistics showing a surge in retail sales last month when consumers splashed out to celebrate European championship soccer games.

The reports add to the complexity of the Bank of England’s assessment on whether to rein in stimulus. While pent-up savings have pushed inflation past the central bank’s target in each of the past two months, concerns are growing about the number of people being told to self-isolate because of the rapidly spreading delta variant of Covid-19.

“July saw the U.K. economy’s recent growth spur stifled by the rising wave of virus infections, which subdued consumer demand, disrupted supply chains and cast a darkening shadow over the outlook,” said Chris Williamson, chief business economist at IHS Markit.

U.K. Economy Shows Signs of Slowing as Covid Hits Supply Chains

The pound extended declines after both U.K. Services and manufacturing measures came in below estimates. Sterling fell as much as 0.3% to $1.3724.

The PMI data fits into a broader picture of increasing pressures on the economy and waning confidence, suggesting that the rapid bounce-back from lockdowns is starting to moderate.

The survey showed:

  • An overall index tracking output fell to 57.7 in July from 62.2 the month before. Economists had expected little change
  • Indexes tracking services and manufacturing both fell to their lowest in four months
  • Expectations for the year ahead fell to the lowest since October
  • Inflation in the form of costs paid by companies rose at the fastest pace in the survey’s two-decade history
  • Employee pay pressures also increased

What Bloomberg Economics Says ...

“The composite PMI posted a sharp drop in July, providing further evidence the economy has passed peak growth. We still think GDP will move above its pre-virus high this year, but the drop in the survey highlights how greater caution in the face of the virus could slow the recovery by more than we expect.”

--Dan Hanson, Bloomberg Economics. Click for the REACT.

That set a different tone from the retail sales data for the previous month, when consumers splashed out in grocery stores to celebrate the performance of England’s soccer team. Sales in shops and online rose 0.5% from the previous month, stronger than the forecast for a small drop.

Prime Minister Boris Johnson dropped many of the last remaining restrictions on social distancing this week even though the surge in infections is stirring concerns about whether a further clampdown will be needed in the weeks ahead.

For now, the signs are that consumers are splashing out savings they accumulated during the Covid-19 restrictions. A separate report from GfK showed consumer confidence reached its strongest level since the start of the pandemic. That included a big jump in a sub-measure with shoppers agreeing that now is the “right time to buy.”

©2021 Bloomberg L.P.