Economy shows resilience as prices surge

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

Robust growth in Britain’s service and manufacturing companies continued this month, despite uncertainty caused by the war, according to the flash composite purchasing managers’ index (PMI) published by S&P Global and IHS Markit. The index dipped by 0.2 points to 59.7 this month, remaining well above the 50 point mark that separates growth from contraction.

However, optimism among business leaders fell to its lowest since October 2020 because of concerns about inflation and the impact of Russia’s invasion of Ukraine, according to the survey of 1,300 manufacturing and service providers between March 11 and 22. Rising fuel, energy and staff costs resulted in the steepest rise in prices charged by companies since the index began in November 1999.

Higher commodity prices have fuelled concerns that energy bills, which are set to rise by 54 per cent next month, will jump again in the autumn. Rising fuel and shop prices are set to push up the cost of living and eat into disposable income this year, which official forecasters have warned will suppress demand and, as a result, growth.

Activity in the services sector rose to a nine-month high of 61 on the index, up from 60.5 in February, as the hospitality sector regained momentum after the lifting of restrictions. However, manufacturing output fell to a five-month low of 52.6, a sharp drop from 56.9 in the previous month. The overall index for manufacturing dropped to a 13-month low of 55.5, down from 58 in February, as orders fell because of uncertainty among clients caused by the war in Ukraine.

Nicholas Farr, assistant economist at Capital Economics, said that the surge in commodity prices since Russia’s invasion had pushed up costs for businesses. “Unsurprisingly, given the surge in commodity prices since the war in Ukraine began, the input prices balance of the composite PMI rose a bit further, from 81.6 to 81.7, and firms reported passing these costs on, with the output price balance reaching its highest level since the series began in 1999,” he said. “Overall, the PMI survey offers some encouragement that the economy has been fairly resilient to the war in Ukraine so far. But this probably won’t last.”

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

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