PMI: Significant improvement in business conditions during May, but cost inflation continues to rocket

Staff at the Morning Star Bar in Belfast preparing to reopen. The reopening of hospitality and non-essential retail helped drive activity in the north's private sector during May. Picture by Hugh Russell.

BUSINESS conditions improved significantly in the north during May, but severe rates of inflation continue to act as a potential headwind to the rapid economic recovery from the pandemic.

A new report from Ulster Bank found activity in the private sector ramped up last month following the easing of lockdown restrictions and the reopening of the retail and hospitality sectors.

The increased workloads saw firms expand staffing levels unsurpassed in 19 years of the lender’s Purchasing Managers Index (PMI).

But the monthly survey, which is based on the experiences of 200 private businesses, showed no let-up in the acceleration of input costs for businesses, which hit a new record high for the third successive month.

Around 70 per cent of businesses responding to the survey signalled a rise in input prices during May, with the remainder seeing no change.

Firms continued to report higher costs for raw materials, transportation and staff, with a number of companies linking the increased cost burdens to Brexit.

Retail posted the fastest rise in input costs, with the PMI showing businesses passing on the sharp rise in costs onto customers.

The rate of output price inflation in Northern Ireland continued to outpace all other UK regions.

Ulster Bank’s chief economist Richard Ramsey said PMI surveys around the world hit record highs in May.

“While falling short of record highs, local firms did report the fastest rates of expansion in business activity and new orders in 40 months.

“The last time local businesses posted faster rates of output growth was back in the summer of 2014.”

The PMI, which analyses the manufacturing, construction, retail and services sectors, recorded output growth in all four for the first time since January 2019.

Retail and manufacturing reported the fastest rates of expansion during May.

“Northern Ireland’s services firms finally posted a pick-up in new orders for the first time since the pandemic took hold,” said Mr Ramsey.

“Construction was the only sector not to see a pick-up in new orders with incoming demand falling significantly and marking the sixth successive month of decline. This contrasted starkly with UK construction firms which saw new orders hit the fastest growth rates to date.”

But he said the record highs reflected a double-edged sword for the economy.

“Manufacturers, retailers and construction firms also raised the prices of their goods and services at the fastest pace in the survey’s nineteen-year history.

“Across the UK, Northern Ireland firms continue to experience the most severe rates of inflation with firms invariably linking the increased costs and lengthening delivery times to Brexit paperwork.”

But the economist said the optimism in the north’s private sector continues to improve, with and sentiment in manufacturing hitting a new survey high.

“Northern Ireland could well see a new high in output growth in the next month or two,” said Mr Ramsey.

“Nevertheless, significant challenges remain. Global supply chain disruption and inflationary pressures, though expected to be transitory, will act as a headwind to the rapid recovery.

“Meanwhile as we saw last week, the continuing saga that is Brexit and the Northern Ireland Protocol, will be a source of political and economic turbulence for the foreseeable future.”

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