UK business enjoys unexpected recovery after six-month slump

British business activity rebounded in February after six months of lower output, indicating the strength of the UK economy, a carefully monitored poll showed on Tuesday.

The S&P Global/Cips Purchasing Managers’ Index (PMI), which tracks monthly changes in manufacturing activity and services, rose to 53 this month from 48.5 in January. This is the highest level in eight months and well above analysts’ forecasts (49).

The reading was above the neutral 50, indicating that most businesses are reporting an increase in activity for the first time since July 2022.

“In February, the sun came out after six months of darkness, leading to a rapid and significant jump in private sector output,” said John Glen, chief economist at Cips.

Respondents to the survey, which was conducted from February 10 to 17, noted growing consumer demand and a more positive business outlook compared to the last months of 2022, as economic uncertainty eased and inflation lightweight.

Daniel Mahoney, British economist at Handelsbanken, said “a much better-than-expected PMI reading could signal that forecasters are currently overly optimistic about the short-term growth outlook for the UK economy.”

Service providers reported a particularly strong rise in business activity, with the index rising to 53.3 from 48.7 the previous month as demand for services remained strong despite reduced consumer spending.

Customer demand as well as improved supply chains also helped boost industrial output, with the manufacturing output index climbing to a nine-month high of 51.6 in February.

Line chart of the UK Composite Purchasing Managers Index (above/below 50 = expansion/contraction) showing the recovery in UK business activity in February

Chris Williamson, chief business economist at S&P Global Market Intelligence, said Tuesday’s data “point to encouraging resilience of the economy in the face of headwinds.”

“The stress caused by last fall’s ‘mini-budget’ also continues to seep out of the financial system.”

Poll follows sequence encouraging official date showing that the UK economy narrowly avoided recession in the last quarter of 2022, while inflation eased and the job market remained resilient despite headwinds.

The trend was further reinforced on Tuesday, when the Office for National Statistics said that public finances recorded an unexpected increase. £30 billion in the fiscal year to January, most of which came from higher-than-expected tax revenues.

Sam Cooper, director of market risk solutions at Silicon Valley Bank UK, said: “The unexpected rise in UK manufacturing and services PMI data is a welcome signal for the UK economy, especially after public sector net borrowing showed an improvement in public finances.”

Manufacturing costs of businesses that drive consumer price inflation fell for the third consecutive month in February, according to the PMI survey, with manufacturers noting a particularly noticeable slowdown in price pressures.

General inflation fell to 10.1 percent in Januarycompared to a 41-year peak of 11.1 percent in October last year, the ONS reported last week, raising expectations that the Bank of England may soon stop raising interest rates.

But Williamson said: “The resilience of the economy and the toughness of inflation readings in the review raise the likelihood of further tightening by the Bank of England, and perhaps more aggressively.”

This could dampen expectations for future growth and “suggests that a year-end recession cannot be ruled out,” he added.

The Bank of England raised interest rates by half a percentage point this month to 4 percent, a 15-year high.

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