Disrupted supply chains hold back economic growth

Supply Chain issues

Supply chain problems in the construction sector and rapidly rising energy prices are fuelling inflation and holding back economic growth.

In a sign that cost pressures are bearing down on all parts of the economy, a closely watched survey found input prices in construction rose at a near record rate last month. This weighed on growth, which slowed to its weakest pace since the lockdowns began.

Although demand for construction projects is holding up well, businesses are struggling to fulfil contracts as prices of concrete, steel, timber and fuel continue to rise. Transport delays and labour shortages are also weighing on the industry, according to IHS Markit’s purchasing managers’ index.

Manufacturing and services sector businesses are facing similar challenges. The construction PMI fell from 58.7 to 55.2 in August, the lowest since February this year, although it remains above the 50 mark that signifies growth. The all-sector PMI, which combines the services and manufacturing sector, is at a six-month low at 54.9.

The problems have been affecting businesses across the economy. Sales of new cars fell by more than a fifth to their lowest August level in eight years amid a global shortage of semiconductors, which is holding back production, according to the Society of Motor Manufacturers and Traders.

While some of the inflationary pressures are likely to ease over time, energy prices are expected to rise, hitting businesses and consumers across Europe. The cost of natural gas and electricity has surged to record highs in recent days as a supply crunch has hit just as demand is gathering pace.

Rising fuel prices are expected to drive inflation in the UK to 4 per cent this year, up from its current 2 per cent. At 3.4 per cent, inflation in Germany has reached its highest level since 2008.

Central bankers maintain that some of the cost pressures will prove temporary and that inflation will fall back to target over the coming years. Catherine Mann, the newest member of the Bank of England’s monetary policy committee, said yesterday that the latest pressures were unlikely to lead to a repeat of the inflation crisis of the 1970s.

The IHS Markit/CIPS survey also pointed to signs that inflationary pressures have peaked. Input cost inflation in the construction sector rose at its second-fastest pace since records began in 1997 but has come down from record highs in recent months.

Businesses have responded to the weaker growth in new orders by scaling back their recruitment plans. Job creation in the construction sector eased to a four-month low.