Britain's rapid economic bounce back from the coronavirus pandemic slowed sharply in July, as a new wave of cases forced hundreds of thousands of workers to self-isolate under government rules to limit the spread of the disease.
Supermarkets and hauliers say staff shortages are making it hard to restock shelves and deliver goods, and Friday's monthly purchasing managers' index (PMI) data gave the first clear evidence of the scale of the impact.
The IHS Markit/CIPS flash composite PMI dropped to 57.7 in July from 62.2 in June.
A reading above 50 indicates growth in the economy but the reading was the lowest since March and a sharper fall than most economists had forecast in a Reuters poll.
“July saw the UK economy's recent growth spurt stifled by the rising wave of virus infections, which subdued customer demand, disrupted supply chains and caused widespread staff shortages, and also cast a darkening shadow over the outlook,” Chris Williamson, chief business economist at IHS Markit, said.
The economy was still on course to expand in the third quarter, but at a slower pace than before, he added.
The British PMI contrasted with the one for the euro zone, which struck its highest since July 2000, and sterling extended losses after the data.
Britain's economy has rebounded after its nearly 10% slump in 2020, when the country suffered one of the world's heaviest coronavirus death tolls and locked down for longer than many other European nations.
But reopening has created bottlenecks and inflation pressures. Two Bank of England policymakers have suggested an early end to the BoE's bond-buying stimulus.
Friday's PMI data showed a record rise in businesses' costs and a near-record increase in the prices they charged.
However, the weaker-than-expected activity figures are likely to make other policymakers wary of scaling back support next month. The BoE is due to announce its next policy decision on August 5.
“Given today's numbers, the uncertainty around the Delta variant and the impact of the end of the Job Retention Scheme from September, we expect the Bank to stick to its current course,” Willem Sels, chief investment officer at HSBC's wealth management division, said.
Consumers see clouds ahead
The slower growth in business activity seen in the PMI survey – conducted July 12-21 – contrasted with a return to pre-pandemic consumer confidence levels in a survey by market researchers GfK published earlier on Friday.
However, households did express greater concern about the economic outlook than a month earlier, due to worries about Covid-19 variants, rising inflation and reduced furlough support.
Other figures showed retail sales volumes rose 0.5% in June to stand 9.5% above pre-pandemic levels, bolstered by a jump in food and drink during the Euro 2020 soccer tournament.
Monday marked the end of most Covid-19 restrictions on businesses in England, with nightclubs allowed to reopen, mask-wearing requirements largely scrapped and capacity restrictions lifted for pubs, restaurants and shops.
But the reopening has been questioned by critics of the government, coming just as cases are rising again.
The latest wave of infections led to more than 600,000 people in England and Wales being told to self-isolate last week because they were close contacts of people who tested positive and were “pinged” by a government app.
Businesses want the government to bring forward the scheduled August 16 lifting of that requirement for workers who are fully vaccinated or test negative for the virus. The government said it would exempt up to 10,000 workers in food supply chains.
The fall in the PMI was greatest in the services sector, especially among transport and hospitality firms.
Orders growth was the weakest since February and business optimism fell to its lowest since October 2020, before news of effective Covid-19 vaccines. Brexit-related trade frictions also hurt business morale and new orders.
