Business Economics

Booming business activity in Europe and US fuels inflationary pressure

Businesses across Europe and the US are experiencing near-record increases in activity, creating widespread supply shortages and driving up prices as economies on both sides of the Atlantic rebound from the coronavirus pandemic.

Eurozone business activity expanded at the fastest rate for 15 years in June after lockdown measures were lifted, while UK business activity also remained buoyant, according to the IHS Markit purchasing managers’ index published on Wednesday.

In the US, manufacturing activity increased for the fourth consecutive month to its highest level since the PMI survey started in 2007, while services dipped but remained near record levels.

The results suggest that Europe’s main economies will record a strong rebound in the second quarter from their historic pandemic-driven contractions over the past year, analysts said. Recent high-frequency data showed consumers in Europe flocking back to bars and restaurants, booking holidays and travelling to work again.

“The [eurozone PMI] data set the scene for an impressive expansion of [gross domestic product] in the second quarter, to be followed by even stronger growth in the third quarter,” said Chris Williamson, chief business economist at IHS Markit.

Line chart of Purchasing managers' index showing Eurozone business activity rises at fastest pace since 2006

IHS Markit’s flash eurozone PMI rose to 59.2 in June, up from 57.1 in May, its highest level since June 2006 and well above most economists’ expectations. A reading of more than 50 indicates a majority of businesses reported an expansion from the previous month. 

Germany’s PMI hit a decade high of 60.4. The UK interim PMI was 61.7, among the highest since the series began in 1998.

Nadia Gharbi, an economist at Pictet Wealth Management, said: “It is boom time for eurozone businesses, even if it is not so much the level of the PMIs that matter but the direction.”

However, building inflationary pressures are becoming more of a problem in both Europe and the US as companies said they were passing on higher input costs to customers at an unprecedented rate.

IHS Markit said eurozone businesses reported the biggest increase in their backlogs of work since data collection began in 2002, as supply problems spread from manufacturing to the services sector, where backlogs rose at the fastest rate in more than 20 years.

It was a similar picture in the UK, where the measure of input cost inflation based on business leaders’ reports rose for the fifth month in a row, equalling the previous highest rate on record, and rates of output price inflation touched an all-time high for the second month in a row.

Supply constraints were also recorded at US businesses, according to the PMI survey, which said goods producers were “hampered in particular by significant supplier delays” while both manufacturing and services sectors reported “difficulties finding staff”.

Williamson said the US economy “continues to run very hot” and prices for goods and services are “still rising very sharply, record supply shortages are getting worse rather than better, firms are fighting to fill vacancies and manufacturers’ warehouse stocks are being depleted at a worrying rate as firms struggle to meet demand”.

He predicted “further upward pressure on inflation in the coming months”, adding that many companies were “struggling to meet demand, suffering shortages of both raw materials and staff”.

Inflation has already topped the targets of both the European Central Bank and the Bank of England, but both expect price pressures to fade next year.

In the US, inflation is well above the Federal Reserve’s target and policymakers have signalled their intention to start raising rates in 2023.

Services businesses in the eurozone reported a particularly strong rebound in activity and “higher supplier prices, increased fuel and transport costs, plus rising wage pressures”, IHS Markit said. Prices charged for goods and services “rose at an unprecedented rate”.

Companies in the UK are hiring workers at the fastest rate recorded by the IHS Markit survey, while eurozone companies’ hiring hit its highest level since August 2018.

Jack Allen-Reynolds, economist at Capital Economics, said: “The demand for labour has suddenly shot up as large parts of the economy have opened at once, and this was never going to be an easy process.”

The flash PMI surveys are published about 10 days before the final PMIs, and typically include about 80 per cent of total responses.