- August’s flash PMIs were consistent with the dominant narratives of recent months. The pace of activity growth continued to cool, particularly in the services sector, while price pressures remained elevated.
- In both cases, supply constraints are the key driver of recent trends, both in terms of labour and component shortages. While the end of the furlough scheme should alleviate the former, the latter is likely to take longer to resolve.
Martin Beck, senior economic advisor to the EY ITEM Club, says:
“August’s flash survey reported a further softening in the pace of activity growth, with the manufacturing and services PMIs reaching five- and six-month lows respectively. With regard to services, this is mostly because the large gains from reopening the economy after lockdown are now behind us. For manufacturing, where activity was largely unaffected by lockdown restrictions, component shortages appear to be key.
“The poor relationship between the PMIs and GDP during the pandemic cautions against using today’s results to predict GDP. But the EY ITEM Club views the results as being consistent with its forecast, which shows strong GDP growth by historical standards in Q3, but some way below the pace seen in Q2.
“The balances for costs and prices fell slightly in August, albeit they remain high by historical standards. The elevated balances reflected a combination of strong wage inflation, caused by labour shortages, and raw material prices being driven up by global component and raw material shortages. The end of the furlough scheme in September should help to alleviate labour shortages, given that sectors with high numbers of vacancies have also tended to see high usage of the furlough scheme. But while supply chain disruption should begin to unwind as we move through H2 2021, rebuilding inventories and clearing backlogs will take time.”