The economic recovery slowed last month as the pingdemic hit consumer spending and staffing in Britain’s dominant services sector.
Labour shortages, rising wages and higher costs also drove companies to increase their prices at the fastest pace in at least 25 years, according to the closely watched purchasing managers’ index for services in July.
The PMI survey, compiled by IHS Markit and the Chartered Institute of Procurement and Supply, confirmed that the economy has been hit by millions of staff being forced to self-isolate under Covid-19 rules, as companies had to reduce operations. Demand has been hit further as people have stayed at home rather than going to shops and restaurants.
The reading of activity in the services sector, which accounts for four fifths of national output, dropped from 62.4 in June to 59.6. Although well above the 50 mark that indicates growth, it was the slowest rate of expansion since the end of lockdown in March.
“While many firms commented on strong consumer spending and a sustained recovery in demand, there were reports that Covid-19 isolation rules had negatively influenced sales volumes,” the survey said. “Many service providers commented on staff shortages due to Covid-19 isolation rules.”
Samuel Tombs, at Pantheon Macroeconomics, the consultancy, said: “The sizeable drop in the services PMI adds to evidence that the surge in Covid-19 cases has caused the recovery to falter.”
Staffing was already causing problems but shortages grew more acute in July, creating wage pressures that “contributed to the fastest increase in overall input costs since the survey began in July 1996”, IHS said. Services sector companies raised their prices “at a survey-record pace”.
Evidence that wages and prices are rising will pose a dilemma for the Bank of England. It has argued inflation is transitory, with higher energy prices and components caught in supply chain disruptions, but it has said that a pick-up in wages could lead to more lasting price rises.
Severe staff shortages among night nurses and lorry drivers have forced employers to offer signing-on bonuses of up to £10,000. Demand for jobs was solid, the survey found, with problems caused by a lack of candidates.
Backlogs of work are continuing to increase as companies are struggling to rebuild their capacity to meet demand “due to supply issues and lengthy wait times to fill vacancies”.
Services companies remain “highly upbeat about their growth prospects for the year ahead”, IHS said. About 57 per cent expect business activity to expand.
