LONDON, April 1 - British factory cost pressures escalated sharply in March, while delivery delays lengthened to levels not seen since mid-2022, a survey showed, highlighting the knock-on effects of the Middle East conflict on supply chains and producer prices.
The final S&P Global UK Manufacturing Purchasing Managers' Index (PMI) for March stood at 51.0, lower than the preliminary 51.4 reading and below February's 51.7. The survey's output gauge dropped to 49.2 - its first reading below the 50.0 threshold, indicating contraction, since September. That was a fall from February's 52.5. Growth in new orders also softened over the month.
Manufacturers' input costs accelerated to a reading of 71.0 in March, the fastest pace of increase since October 2022. The month-on-month change from February was the largest jump in this index since October 1992, the period after Britain left the European Exchange Rate Mechanism. The March input costs measure was slightly above the preliminary estimate of 70.2, S&P Global said.
S&P Global attributed the surge in input prices mainly to higher oil and gas costs and to rising transportation expenses stemming from the escalating conflict in the Middle East, which has prompted ships to reroute away from key passages. Output prices climbed by the most in nearly a year as manufacturers began to pass on these higher input costs to customers.
Rob Dobson, director at S&P Global Market Intelligence, linked the geopolitical flare-up and concerns about domestic economic policy to a pullback in production:
"The war in the Middle East and ongoing concerns about domestic economic policy led to a scaling back of production," Dobson said.
Dobson added that growth in new orders suggested the decline in production was likely a reflection of supply constraints rather than a collapse in demand, although he cautioned that demand could come under pressure if the conflict is not resolved quickly.
Delays to deliveries increased at the fastest pace since July 2022 as shipping routes were adjusted to avoid the Strait of Hormuz. The rerouting followed actions by Iran that effectively closed the passage after what were described as U.S.-Israeli attacks on Iran that began in late February.
The PMI data underline the dilemma facing the Bank of England. Market participants anticipate the Bank could lift interest rates two, or possibly three, times this year in an effort to prevent a spike in inflation driven by the war from becoming entrenched. However, most economists polled think the central bank is likely to wait until there is clearer evidence of how large the conflict's economic impact will be.
Forecasters note that the already weak pace of economic growth could temper the upside risks to inflation. The PMI's employment index fell for a 17th consecutive month, and at a faster pace than in the previous seven months. Meanwhile, firms' expectations for activity over the coming year slid to a six-month low.
Implications at a glance
The survey points to rising input-price inflation and logistics disruption for sectors reliant on oil, gas and international shipping, while manufacturing output and hiring remain under pressure. Policy makers face a trade-off between addressing inflation risks and supporting an economy experiencing weak growth.