First signs of economic impact of war in Ukraine and the cost of living crisis

22 June 2022

The sharp drop in the S&P/CIPS Composite PMI suggests the impact of the war in Ukraine is starting to take a heavy toll on business confidence in the UK, although it isn’t pointing to a collapse in output yet. However, the sharp drop in business optimism about the future and surging price pressures suggests activity is likely to fall sharply over the next few months.

What’s more, the survey suggests that price pressures are continuing to grow. Indeed, today’s data makes it even more likely that the Monetary Policy Committee (MPC) will raise interest rates at its next meeting on 5 May.

Soaring energy costs biting at services output

The fall in the composite PMI from 60.9 in March to 57.6 in April reflected a drop in almost all of the sub-index components. The only sub-index to rise was the input prices balances as the surge in commodity prices pushes up costs.

The drop in composite PMI was driven by a slump in services PMI from 62.6 to 58.3 and was the largest fall since the hit from Omicron at the end of last year. This potentially reflects concerns about the cost-of-living crisis war in Ukraine dampening demand for services.

Supply chains holding up for now

The manufacturing PMI held up at 55.3 compared to 55.2 in March as manufacturers worked through backlogs and experienced fewer supplier delays. Indeed, the suppliers delivery times balance ticked up again, indicating that supply chain pressures are easing.

This is unlikely to be maintained over the rest of the year. As the impact of the war in Ukraine on supply chains and coronavirus-related shutdowns in China starts to filter through, UK supply chains pressures are likely to significantly worsen again. Indeed, the manufacturing PMI was boosted by a jump in the input prices balance to its second-highest level on record. And optimism about future output fell to its lowest level since the initial wave of the pandemic in 2022, which suggests output in the sector may start to fall in the coming months.

Overall, the PMI suggests the surge in energy and commodity prices is continuing to push up costs, and those businesses are increasingly passing those costs onto the consumer. That will keep inflation high for the rest of the year. Indeed, we expect CPI inflation to average around 7.5% this year. It’s also clear that the cost-of-living crisis is having a material impact on the economy, which is only likely to get worse over the next year. While we aren’t forecasting a recession in the UK, it wouldn’t take much further deterioration to push the UK into one.