Consumers splashing out on holidays has helped put Britain’s economy on track to avoid predictions of a contraction in the first three months of the year, paving the way for the Bank of England to raise interest rates next month.
The latest monthly snapshot from S&P Global and the Chartered Institute of Procurement and Supply (Cips) showed the fastest rebound in private sector output in a year, fuelled by rising spending on travel, leisure and entertainment.
Chris Williamson, the chief business economist at S&P Global Market Intelligence, said the report indicated the economy grew by 0.4% in the first quarter.
That would be a much stronger performance than predicted by the Bank of England, which has forecast the UK economy would contract by 0.1% between January and March, as households and businesses come under growing pressure from the highest levels of inflation for four decades. The figure will be published by the Office for National Statistics next month.
A 12th consecutive interest rate increase at the Bank’s next meeting on 11 May was “an increasingly done deal”, Williamson added. “The key takeaway is that the economy as a whole is not only showing encouraging resilience but has gained growth momentum heading into the second quarter.”
The monthly survey of 1,300 service sector and manufacturing firms, which is closely watched by the Bank and the Treasury, showed pockets of resilience in the economy despite the cost of living crisis.
The flash composite purchasing managers index, compiled from firms’ survey responses on current economic conditions, rose from 52.2 in March to 53.9 in April, the highest level for 12 months. A reading of 50.0 separates private sector growth from contraction.
The figures come after the boss of easyJet suggested earlier this week that British consumers were shrugging off cost of living crisis concerns to focus their spending on experiences.
“While there is a squeeze on people’s incomes, people prioritise holidays and travel even more than they did before,” Johan Lundgren said. “This is driven by the fact that people are refocusing on experiences and doing things rather than investing in their homes, perhaps.”
According to the latest reading on the PMI, robust levels of service sector activity were offset by a sharp fall in manufacturing output, with factory orders for white goods coming under pressure amid weaker consumer demand.
John Glen, the chief economist at Cips, said there were stark differences in the fortunes of both sectors, adding: “Consumers chose holidays over white goods.”
Manufacturers blamed a fall in new work on customers running down stockpiles, soaring energy costs and subdued demand from consumers for big-ticket purchases. Companies had filled their inventories amid global supply chain disruption during the Covid pandemic, at a time when consumers rushed to buy goods as travel and hospitality were closed or severely disrupted.
The monthly survey showed pressure on supply chains eased further in April, as delivery times fell for the third month running because of the improved availability of raw materials and lower demand. However, firms noted difficulties with sourcing electrical items amid supply constraints across Asia.
Rhys Herbert, a senior economist at Lloyds Bank, said consumers were yet to fully feel the impact from higher interest rates.
“Private sector services continue to perform well, helped by consumer spending holding up better than expected. However, consumers are yet to feel the full impact of rising interest rates.
“Few expect a sharp rebound in manufacturing given the sector’s relative weakness globally, and the rebound in the pound could pose some competitiveness issues if it gathers pace.”
