Economy shows resilience as prices rise

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The economy has so far suffered a smaller setback than expected from Russia’s invasion of Ukraine, but companies are facing the steepest price increases since at least 1999, according to a key survey.

According to the flash composite purchasing managers index (PMI), published by S&P Global and IHS Markit, strong growth in UK service and manufacturing businesses continued this month, despite the uncertainty posed by the war. The index fell 0.2 points to 59.7 this month, remaining well above the 50-point barrier separating growth and contraction.

Optimism among business leaders, however, fell to its lowest level since October 2020 amid concerns about inflation and the impact of the Russian invasion of Ukraine, according to the survey of 1,300 manufacturing and service suppliers between March 11 and 22. Rising fuel, energy and personnel costs resulted in the strongest price increase for companies since the index’s inception in November 1999.

Higher commodity prices have fueled concerns that utility bills, set to rise 54 percent next month, will rise again in the fall. Rising fuel and retail prices will push the cost of living and food into disposable income this year, which official forecasters have warned will dampen demand and, as a result, growth.

Service sector activity rose to a nine-month high of 61 on the index, from 60.5 in February, as the hospitality industry regained momentum after restrictions were lifted. However, manufacturing output fell to a five-month low of 52.6, down sharply from 56.9 the previous month. The overall manufacturing index fell to a 13-month low of 55.5, down from 58 in February, as orders fell amid customer uncertainty caused by the war in Ukraine.

Nicholas Farr, an assistant economist at Capital Economics, said the rise in commodity prices since Russia’s invasion had pushed up costs for businesses. “It is not surprising that, given the sharp rise in commodity prices since the start of the war in Ukraine, the composite PMI input price balance rose slightly further, from 81.6 to 81.7, with companies reporting that these costs were passed on, with the output price balance reaching its highest point. level since the series began in 1999,” he said. “Overall, the PMI survey offers some encouragement that the economy has so far been fairly resilient to the war in Ukraine. But this probably won’t last.”

Martin Beck, chief economic adviser to the EY Item Club, said the economy appears to have weathered the slowdown in activity after Omicron and the impact of the war in Ukraine on business sentiment. “While the flash manufacturing PMI fell to 55.5 from 58.0 in February, the services index rose from 60.5 to 61.0,” he said. “As a result, the March composite PMI for flashes of 59.7 declined only slightly from February’s 59.9 and remained well above its long-term average.”

Beck added: “That said, the forward-looking indicators were less optimistic. Notably, the business confidence measure of the S&P Global/CIPS survey fell to its lowest level since October 2020.” While direct trade between the UK and Russia is very low, new supply chain disruptions have emerged due to the importance of Russia and Ukraine as commodity exporters, he said.

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