The UK may be on course to dodge a winter recession, after an influential business survey suggested business activity and input cost inflation were both accelerating.
But economists warned the new data might also encourage the Bank of England to “double down” on its narrative of interest rates benign “higher for longer”
The S&P Global / CIPS Flash United Kingdom PMI found that private sector output is growing at its fastest pace in six months. The monthly PMI reading came to 51.7, up from 50.7. Any figure above 50 represents growth and any figure below means the sector is in decline.
Economists had expected this month’s PMI figure to tick upwards only slightly, to 51.0.
The December figures will be a major relief after a shock 0.3% decline in GDP in October fuelled fears that the UK is on course for a winter recession. A recession is typically defined as back-to-back quarters of declining GDP. With GDP flat, that threshold can’t be breached until the first quarter of 2024.
The dominant service sector continued to grow, also at the fastest pace in six months, while manufacturing remains in decline.
Meanwhile, Input cost inflation hit its highest level since August, “driven by another sharp rise in operating expenses at service sector companies”.
S&P said the rise was mostly due to higher salaries.
Chris Williamson, chief business economist at S&P Global Market Intelligence, said: “The UK economy continues to dodge recession, with growth picking up some momentum at the end of the year to suggest that GDP stagnated over the fourth quarter as a whole. While employment meanwhile fell for a fourth month, the decline was only marginal and not indicative of any material rise in unemployment.
“This is, however, a dual-speed economy, with manufacturing contracting sharply while services regained some poise, the latter growing faster in December thanks in part to financial services activity being buoyed by hopes of lower interest rates in 2024.”
But Alex Kerr, assistant economist at Capital Economics, warned the signs of strength are likely to mean interest rates cuts may not come until late next year. The Bank of England's Governor Andrew Bailey tempered hopes that rate cuts were coming soon yesterday, saying that there is still "some way to go" to bring inflation back under control as the Bank voted to keep its base rate at 5.25% again.
Kerr said: “The rise in the flash composite activity PMI, from 50.7 in November to 51.7 in December, suggests that the economy may avoided a contraction in Q4. And the stickiness of price pressures will only encourage the Bank of England to double down on its narrative that rates will stay high for longer.
“Overall, the resilience of activity and stickiness of price pressures will only add to the Bank of England’s unease. This supports our view that lingering inflation pressures will prevent the Bank from cutting rates until after the Fed (Q1 2024) and ECB (Q2 2024). But the soft wage data this week suggest that they may not wait quite as long as our forecast of late in 2024.”
The UK figures are in contrast to the EU, where the PMI dipped to 47.0, representing an economy firmly in decline.
