February brings surprising vigor to UK economy

According to a survey published on Tuesday, the UK economy is showing unexpected signs of growth and may be on course to sidestep a forecast recession, as businesses reported an unexpected bounce in activity in February along with receding price pressures. The preliminary “flash” reading of the S&P Global/CIPS UK Composite Purchasing Managers’ Index (PMI) jumped to 53.0 in February from 48.5 in January, exceeding all forecasts in a Reuters poll of more than 20 economists. This is the first time the index has been above the 50 threshold for growth since July.

The dominant services sector drove the improved reading, which financial data company S&P Global put down to recovering global demand and stability since the market turmoil associated with the brief premiership of Liz Truss. The PMI for the services sector rose to 53.3 in February from January’s 48.7, the highest reading since June last year. In contrast, factory activity continued to contract but at a much reduced pace, with the manufacturing PMI increasing to 49.2 from 47.0, close to 50, the no-change mark.

The survey suggested that Britain’s economy may be in slightly better shape than many forecasters had predicted, although similar unexpected strong readings in the past have sometimes turned out to be blips. “Many expected the UK to be in recession by now, with the PMI now showing the end of a consistent trend of contraction over seven months,” said Rhys Herbert, senior economist at Lloyds Bank. However, Herbert said there was little to celebrate about Britain’s economy either, and while slowing inflation could help to forestall a recession, there were still headwinds.

Crucially for the Bank of England as it weighs another interest rate hike, the PMI’s price indexes, a good guide of future inflation pressure, continued to fall, with businesses’ costs rising at the slowest pace since April 2021. The survey data boosted the likelihood of a BoE rate hike next month, something which most economists polled by Reuters already expect.

Moreover, a Barclays survey of small and medium-sized British firms showed that 41% were confident about the outlook, a nine-month high. Chris Williamson, S&P Global Chief Business Economist, commented that the much better than anticipated PMI data for February indicate encouraging resilience of the economy. “While many companies continue to report tough operating conditions, especially in the manufacturing sector, the broader business mood has been buoyed by signs of inflation peaking, supply chains improving and recession risks easing.”