A rebound across the UK’s services sector in February has raised hopes that the country might avoid recession in the first half of this year.
Analysts said the bigger than expected surge in business activity appeared to show that the UK would narrowly avoid a recession, though the squeeze on consumer spending from the energy crisis and a struggling manufacturing sector would continue to put the brakes on the economic recovery.
The pound edged up by more than half a cent to hit $1.211, the highest since last Wednesday as foreign exchange analysts calculated that stronger economic growth would increase the chances of further interest rate rises by the Bank of England to cool inflation.
Bank of England rate-setters said in their most recent outlook for the UK economy they expected gross domestic product (GDP) to shrink by about 1% across this year and the first quarter of 2024, making it the only G7 nation to suffer a recession in 2023.
The early or “flash” measure of private sector activity by S&P Global/Cips found that the services industry index jumped to an eight-month high of 53.3, where a figure above 50 indicates expansion.
The index shows how much firms have increased production, employment and their order books to achieve a rounded measure of commercial activity.
Services companies, which make up about three-quarters of private sector activity, reported a stronger demand for business services “amid an improving global economic outlook and reduced domestic political uncertainty”.
Chris Williamson, the chief business economist at S&P Global Market Intelligence, which compiled the index, said business confidence was damaged in the second half of last year, which was characterised by a fractious Conservative party leadership election and the unstable premiership of Liz Truss.
“The broader business mood has been buoyed by signs of inflation peaking, supply chains improving and recession risks easing. The stress created by last autumn’s mini-budget is also continuing to work its way out of the financial system,” he said.
The composite flash PMI, which includes the manufacturing sector, increased to 53.0 after a rebound in factory output for the first time in six months.
The manufacturing PMI remained below 50 at 49.2, but firms pointed to stronger demand from overseas clients and that “improving supply conditions had helped to boost factory production”.
A survey by the CBI found that factory owners were much gloomier than the PMI registered after a drop in output and orders.
A net balance of -16% of manufacturers reported a drop in output volumes in the three months to February, the CBI said in its latest healthcheck, revealing the fastest fall in manufacturing output since September 2020.
February’s figure was down from -1% in the three months to January, and “a significant disappointment to last month’s expectations of +19%”, the CBI said.
The quarterly figures are likely to be skewed by the gloom experienced in December after Liz Truss’s mini budget, dragging down the three-month on three-month average, though some analysts said it showed manufacturers continued to be affected by high borrowing costs, Brexit-related export delays and a shortage of skilled workers.
Gabriella Dickens, the senior UK economist at Pantheon Macroeconomics, said: “The CBI survey suggests the manufacturing sector isn’t quite out of the woods yet, in contrast to the message from the S&P Global/Cips PMI released earlier in the day.”
The eurozone composite PMI also revealed a resilient services sector across the 19-member euro bloc, which offset a fall in the manufacturing index from 48.8 to 48.5.
The composite rose to 52.3 in February’s flash estimate, up from 50.3 in January. This was 1.6 points above consensus of 50.7 and the highest reading since May 2022.
According to S&P Global, “rising demand, healing supply chains, order book backlog reduction and improved confidence” underpinned the upturn in the eurozone.
