UK business activity grows faster than forecast

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UK economic activity increased at the fastest pace for seven months in January despite the crisis in the Red Sea adding to manufacturing price pressures, according to a closely watched survey.

The surprisingly strong growth, combined with concerns over sticky inflation, could fuel caution among Bank of England policymakers as they prepare for the next interest rate decision on February 1.

The S&P Global flash UK composite output index rose to 52.5 in January from 52.1 in December, marginally higher than the 52.2 forecast by economists polled by Reuters.

The figure was the highest reading since June and well above the 50 mark that indicates a majority of businesses reporting rising activity.

The latest PMIs add to signs that the economy is recovering from last year’s stagnation, as price pressures ease and markets expect the BoE to cut interest rates from their current 15-year high of 5.25 per cent later this year.

The pound climbed 0.5 per cent against the dollar to $1.2756, its strongest level in nearly two weeks, following the figures.

Chris Williamson, an economist at S&P Global, noted that the strength of growth in January “may deter the Bank of England from cutting interest rates as soon as many are expecting, especially as supply disruptions in the Red Sea are reigniting inflation in the manufacturing sector”.

Inflation unexpectedly increased to 4 per cent in December and concerns over price pressures, resulting from the unrest in the Red Sea, and a resilient economy could lead policymakers to reduce interest rates more gradually than expected by markets.

Markets are pricing that the central bank will start cutting interest rates in June taking the rate to 4.25 per cent by the end of the year, marking a marginal retreat from what was expected last Friday.

The survey is looked to by policymakers as a near-real-time indicator of the health of the economy ahead of official data for December next month.

Williamson said the PMI reading pointed to the economy growing at a quarterly rate of 0.2 per cent at the start of 2024 after a flat fourth quarter, “therefore skirting recession and showing signs of renewed momentum”.

Yields on rate-sensitive two-year gilts rose 0.03 percentage points to 4.4 per cent after the strong PMI data, reflecting declining prices. The pound strengthened 0.4 per cent against the dollar to $1.274.

The survey reported that rising ocean freight rates contributed to the cost burden for factories, with these rising at the fastest pace since March 2023. The index was based on interviews conducted between January 11 and 22.

The data also pointed to the steepest lengthening of vendor delivery times since September 2022, pushing the PMI output index for manufacturing to a three-month low of 44.9.

Input costs also continued to increase in the services sector, although at a slowing pace, and were mostly linked to strong wage pressures. Services drove the improvement with the index rising more than expected to an eight-month high of 53.8 in January from 53.4 the previous month.

Survey respondents cited improved confidence among clients and a turnaround in demand due to lower borrowing costs.

The figures contrast with a continued downturn in the eurozone, where the composite PMI came in at 47.9, barely changed from 47.6 in the previous month and well below the 50 reading.  

James Smith, economist at ING, said the figures were “another signal that the consensus among economists going into this year, which suggests the UK will underperform most major European economies in 2024, looks a bit too gloomy”.

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