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The rapid recovery of UK businesses slowed slightly last month, as businesses held back by capacity constraints and staff shortages; and rising prices.
Growth in UK service companies edged down in June after surging in May, but remained robust.
But cost inflation hit a record high, as companies also reported surging pricing pressures and shortages in supplies and personnel.
This is according to the data firm IHS Markit, whose UK services sector PMI index slipped to 62.4. This shows a slight slowdown in growth from the 24-year high in May 62.9 (any reading above 50 shows growth), but it’s still a high reading showing a big increase in activity.
Staffing levels at service companies have grown at the fastest rate in seven years (both new hires and returning workers from leave) against a backdrop of another sharp increase in new orders.
Businesses have reported increased demand for consumer services thanks to looser pandemic restrictions and increased business investment in response to improving economic prospects
But some still reported staff shortages and other capacity constraints, which meant they were also facing higher volumes of unfinished business – backlogs have grown at the fastest rate since the survey began in 1996.
And input costs and the prices charged by service companies have both increased at an all-time high.
The companies said higher staff salaries, rising raw material prices and higher transportation costs were the main factors driving up costs.
And there has been a ‘marginal reduction’ in export sales among companies in the service sector, with companies highlighting the frictions of Covid-19 and Brexit.
Restrictions on international travel and uncertainties over quarantine policies were the most frequently cited factor. Some companies have also noted that Brexit issues have held back export orders to the EU.
Tim moore, economic director of IHS Markit, says staff shortages and supply chain delays were the most frequently cited factors hampering growth.
“The recovery in the services sector continued at full strength in June, as looser pandemic restrictions were released and dampened demand for business and consumer services. Sales growth slowed slightly from the recent peak in May, but capacity constraints and staff shortages made it difficult for many service providers to keep up with new orders.
“Backlogs have increased at a faster rate than at any time since the start of the survey in July 1996, despite job creation peaking in seven years. Difficulties in filling vacancies were reported by survey respondents across all sectors of the service economy in June, with hospitality and recreation experiencing the greatest pressure.
“Staff shortages and supplier delays were by far the most frequently cited growth constraints in June. Restrictions on international travel, especially uncertainty over quarantine policies at home and abroad, have also been a major source of anxiety. These disruptions in inbound and outbound travel contributed to another slight decline in export sales, which contrasted sharply with the recovery in domestic demand.
The latest survey data has highlighted record inflation rates in input costs and prices charged in the service sector, reflecting rising commodity prices, transportation shortages and staff wages. The imbalance of supply and demand was the main driver, while the decline in pandemic discounts by some service providers amplified the latest round of price hikes. ”
UK vacancies have now reached pre-pandemic levels, as more and more companies have reopened and are looking for staff.
But these shortages are not on top of a booming labor market, some economists say.
Torsten Bell, general manager of the Foundation Resolution, warned last month that the job market is far from tight, with total hours worked still lower than before Covid-19, and more than 2 million people not working as before the crisis.