What next for the economic recovery?

The fastest monthly growth of the services sector since 1997 and a fall in the number of workers on furlough signalled that the UK’s recovery from the coronavirus crisis remained on track in May, as lockdown restrictions were relaxed across all four nations of the UK.

A steep fall in unemployment claims in the US and new data showing an acceleration in the recovery across Europe also indicated that the Covid-19 vaccination programmes across the developed world were helping drive a rebound in economic activity. However, the improved economic situation failed to ignite financial markets after analysts cited concerns about the potential for the boom to peter out due to severe constraints on essential supplies and a lack of skilled workers.

There are still so many factors for investors to weigh, such as whether the economy will overheat or whether new Covid variants could prompt a further economic downturn. There is also an element of having to second guess how central banks and governments will respond to the rapidly shifting backdrop. All of this uncertainty is making it tricky for the markets to make concerted progress as we move towards the halfway point of 2021.

In its monthly snapshot, IHS Markit and the Chartered Institute of Procurement and Supply (CIPS) reported the biggest surge in UK business and consumer spending in May in the services sector for the last 25 years. Employers reported the strongest rate of hiring for more than six years amid a spring boom in the economy, which follows the worst recession for more than 300 years in 2020.

The monthly survey of businesses in the sector that includes hotels, restaurants, finance and IT showed mounting pressure on staff wage bills, raw materials and transport fuelled the steepest rise in costs since July 2008. The IHS Markit/CIPS purchasing managers’ index (PMI) – a closely watched gauge of activity in the services sector, which is responsible for almost 80% of the UK’s national output – increased to 62.9 in May, up from 61.0 in April. Any reading above 50 denotes that the sector is expanding.

The snapshot comes as employers sound the alarm over staff shortages exacerbated by the pandemic and Brexit, as fewer EU workers travel to Britain to find a job. Separate figures from HMRC showed that 1.3 million fewer workers accessed the furlough scheme in March and April, as hiring picked up with employers preparing for the reopening of the economy. According to the tax records, 3.4 million employees remained on furlough at the end of April. Rishi Sunak said the figures showed the government’s programme of job support was working.

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Source: Techlink