Britain’s factories have been rocked by the biggest increase in costs since the aftermath of Black Wednesday more than 30 years ago as conflict in the Middle East batters the economy.
As experts put the UK and Europe on ‘stagflation’ alert, a report showed so-called ‘input prices’ paid by manufacturers for supplies have risen at the sharpest rate since October 1992.
That was the month after Black Wednesday when Britain crashed out of the European exchange rate mechanism – sending sterling tumbling and pushing up prices for UK firms.
The report from S&P Global showed the UK economy expanding at the slowest pace for six months in March as the Iran war sends prices soaring and slams the brakes on economic growth.
‘The war in the Middle East has hit the UK economy in March, stalling growth while driving inflation sharply higher,’ said Chris Williamson, chief business economist at S&P Global.
‘Output growth across manufacturing and services has slowed to a crawl as companies blamed lost business directly on the events in the Middle East, whether through heightened risk aversion among customers, surging price pressures, higher interest rates, or via travel and supply chain disruptions.
‘Inflationary pressures have surged higher on the back of rising energy prices and fractured supply chains. The acceleration in cost growth in the manufacturing sector was especially severe, being the sharpest since the depreciation of sterling following Black Wednesday in 1992.’
S&P Global said its index of private sector activity in the UK – a key measure of how the economy is faring with scores under 50 showing growth and those below signalling contraction – fell to a six-month low of 51 this month from 53.7 in February.
The report noted ‘rising prices paid for fuel, transportation and energy-intensive raw materials’ stemming from soaring oil and gas prices.
Concerns over energy supplies from the Middle East – and particularly through the Strait of Hormuz, which Iran has effectively closed – saw the oil price surge from around $70 a barrel to nearly $120 this month. Crude is currently trading at around $100 a barrel.
S&P Global also reported a sharp slowdown in the eurozone as it too is battered by rising prices, with the index of activity in the single currency bloc dropping to a ten-month low of 50.5.
‘The eurozone and UK economies face a near-term bout of stagflation, characterised by a spike in energy-driven prices alongside a stalling of the economy,’ said Williamson.
He added: ‘The full impact on inflation and economic growth depends not just on the duration of the war but also the length of disruptions to energy markets and shipping.’
The report found evidence of new projects in the Middle East being postponed while manufacturers suffered a slump in demand from overseas – hitting exports and the wider economy.
One in four manufacturers reported longer delivery times from suppliers as shipping routes are disrupted by the confliect.
‘Survey respondents widely noted that extended shipping times from Asia due to re-routing via the Cape of Good Hope, alongside production stoppages at petrochemical suppliers in the Middle East, had led to longer wait times for raw materials,’ the report said.
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