British business enjoys surprise rebound after six-month decline

British business activity rebounded in February after six months of declining output, pointing to resilience in the UK economy, a closely watched survey showed on Tuesday.

The S&P Global/Cips flash composite purchasing managers’ index (PMI), which tracks monthly changes in manufacturing and services activity, rose to 53 this month, up from 48.5 in January. That is the highest level in eight months and well above analyst forecasts of 49.

The reading was above the neutral 50 mark, which indicates a majority of businesses reporting an expansion in activity, for the first time since July 2022.

“The sun broke through in February after six months of gloom with a swift and significant jump in output for private sector business,” said John Glen, Cips chief economist.

Respondents to the survey, which ran between February 10 and 17, highlighted rising customer demand and a more positive business outlook compared with the final months of 2022, as economic uncertainty fell and inflation eased.

Daniel Mahoney, UK economist at Handelsbanken, said the “much better than anticipated PMI readings could signal that forecasters are currently being too downbeat on short-term growth prospects for the UK economy”.

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

Client demand, as well as improving supply chains, also helped to boost factory production, with the manufacturing output index rising to a nine-month high of 51.6 in February.

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

“The stress created by last autumn’s “mini” Budget is also continuing to work its way out of the financial system.”

The survey follows a string of encouraging official data showing that the UK economy narrowly avoided a recession in the final quarter of 2022, while inflation declined and the labour market remained resilient despite headwinds.

This trend was further boosted on Tuesday when the Office for National Statistics said the public finances had registered a surprise £30bn windfall in the fiscal year to January, much of which came from higher than expected tax receipts.

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

According to the PMI survey, businesses’ input costs — which affect consumer price inflation — eased for the third consecutive month in February, with manufacturers registering a particularly marked slowdown in price pressures.

Headline inflation declined to 10.1 per cent in January, down from its 41-year peak of 11.1 per cent in October last year, the ONS said last week, boosting expectations that the Bank of England could soon stop raising interest rates.

But Williamson said: “The resilience of the economy and the stickiness of the survey’s inflation gauges add to the likelihood of the BoE tightening policy further, and potentially more aggressively.”

This may dampen future growth expectations and “suggests that the possibility of recession later in the year should not be ruled out”, he added.

The BoE this month increased interest rates by half a percentage point to 4 per cent, a 15-year high.