Economic recovery hit by record shortages of stock

Supply bottlenecks are choking the UK’s economic recovery as businesses grapple with record stock shortages and a lack of staff, surveys show.

After rebounding strongly from the lockdown, economic activity is slowing more sharply than expected because companies are struggling to boost production to meet demand.

The challenges are particularly acute in the manufacturing sector, where a closely watched survey showed the worst stock shortages on record. A net balance of -14 per cent of businesses had adequate levels of stock in the three months to August, according to the CBI’s latest industrial trends survey.

This was down from -11 per cent in July and the worst reading since records began in 1977. It was also the third record low in as many months.

The problem has been particularly acute in the consumer electronics industry, where a global chip shortage has held back production.

The CBI said that manufacturing output growth eased from record highs last month, although it remains high by historical standards. Alpesh Paleja, lead economist at the CBI, said: “It is notable that stock adequacy deteriorated to a new record low for the third consecutive month. Many firms are feeling the pinch from ongoing supply chain disruption, which also partly explains the continued strength in pricing pressures. Despite the rebound in activity, ongoing disruptions could choke off future manufacturing growth.”

Supply problems are plaguing the manufacturing and service sectors. The latest IHS Markit purchasing managers’ index found that the proportion of businesses saying staff or material shortages were affecting output was 14 times higher than usual, and the highest since the survey began in 1998.

Meanwhile, manufacturers blamed supply bottlenecks for the biggest increase in suppliers’ delivery times since the start of the pandemic.

The IHS Markit/CIPS flash composite purchasing managers’ index fell from 58.2 in July to 55.3, the third consecutive monthly drop and worse than the 58.4 forecast by economists. The 50-mark separates growth from contraction.

“The sharp fall in the composite PMI in August suggests that the economic recovery is starting to be choked off by supply constraints,” Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said. “All told, Markit’s survey supports our longstanding view that after a strong rebound in quarter two, the recovery would shift down to a much slower gear in the second half of the year, putting little pressure on the monetary policy committee to hike the Bank rate early next year.”

The Bank of England expects the headline rate of inflation to hit 4 per cent this year before falling back to the 2 per cent target over the coming years. However, others fear that inflation will be more sustained.

IHS Markit said higher wages and severe shortages of raw materials and critical components pushed up purchasing prices in August. That said, the overall rate of input cost inflation eased to a four-month low, after a 20-year high in July, and factory gate charges increased at the slowest pace since May. Growth in output prices also slowed.