Factory costs in Britain have risen by the most since Black Wednesday, as rising energy prices linked to the Middle East conflict hit the economy and threaten to revive inflation.
New data from S&P Global shows that production costs in Britain’s manufacturing sector rose sharply in March, while overall private sector growth slowed to what economists called a “creep.”
The figures, taken from the closely watched Purchasing Managers’ Index (PMI), point to a rapid deterioration in business conditions, driven by rising oil and gas prices, disrupted supply chains and weakening demand.
The increase in costs is directly related to the rise in global energy prices following the escalation of the conflict in the Middle East. The effective closure of key shipping routes such as the Strait of Hormuz has restricted supply and driven up prices for fuel and raw materials for manufacturing and food production.
The manufacturing input price index rose to 70.2 in March from 56 the previous month, the highest level since the end of 2022 and the sharpest increase since October 1992, the month after Black Wednesday, when the collapse of the pound pushed up import costs.
Brent crude oil prices have risen by more than 40 percent since the end of February and are around $100 a barrel, significantly increasing cost pressures for energy-intensive industries.
At the same time, the entire British economy is losing momentum. The composite PMI, which measures activity in the manufacturing and services sectors, fell to 51 in March from 53.7 in February, below analysts’ expectations.
Although the number is still above the 50 threshold that separates growth from contraction, it represents a six-month low and signals a significant slowdown.
Both key sectors recorded weaker performance. The manufacturing PMI fell slightly to 51.4, while services activity, a key driver of the UK economy, fell more sharply from 53.9 to 51.2.
Chris Williamson, chief economist at S&P Global Market Intelligence, said companies were increasingly attributing lost business directly to the fallout from the Middle East conflict.
“Production growth has slowed to a minimum as companies face increased risk aversion from their customers, rising costs, higher interest rates and continued supply chain disruptions,” he said.
The rapid rise in input costs is fueling concerns that the UK could face a fresh rise in inflation, potentially causing consumer prices to rise above 5 percent later this year if energy prices remain high.
Economists warn that the speed of change is particularly striking. Paul Dales of Capital Economics said the scale and speed of the changes had surprised analysts, even given the expected impact of an energy shock.
The PMI data is often seen as a leading indicator of official inflation figures produced by the Office for National Statistics. While inflation is expected to remain around 3 percent in the short term, the Bank of England has already signaled that it could rise further in the coming months.
Financial markets have responded by revising their expectations of monetary policy. Traders are now expecting several interest rate hikes this year from the current level of 3.75 percent.
Higher borrowing costs would place additional strain on businesses and households, further dampening economic activity and complicating the government’s efforts to promote growth.
Business sentiment has already weakened, falling to a nine-month low as companies continue to cut jobs amid uncertainty.
The UK is not alone in facing these pressures. Similar PMI data shows a slowdown in activity in both the United States and the euro zone, suggesting the energy shock is having far-reaching global implications.
Pantheon Macroeconomics estimates the UK economy could grow by just 0.1 percent in the first quarter of the year, underlining the fragile state of the recovery.
The combination of rising costs, slowing demand and tightening financial conditions presents a difficult outlook for the UK economy.
As energy prices drive up inflation and limit the scope for fiscal support, policymakers are left with fewer and fewer options.
The immediate challenge for companies is to manage cost pressures without compromising competitiveness. Households are at risk of a further deterioration in living standards.
And for the economy as a whole, the latest data suggests that a familiar and unpleasant scenario could be emerging in which weak growth and rising prices collide.
