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UK business shows signs of growth for first time in six months

UK firms A staff member works at PALLITE, a designer and manufacturer of social distancing screens and desks from recyclable paper board, amid the outbreak of the coronavirus disease (COVID-19), in Wellingborough, Britain, July 20, 2020. REUTERS/Andrew Boyers
UK firms are growing this month for the first time since last summer. Photo: Andrew Boyers/Reuters

Activity at UK firms rose in February as the UK economy performed better than expected, according to a gauge of market activity.

The S&P Global/CIPS flash UK purchasing managers' index jumped from 48.5 in January to 53 in February, according to the survey, which is based on preliminary data. Anything above 50 is considered to be growth in the sector, while a number below 50 signifies contraction.

It is the first time in six months that the index has shown growth.

Companies surveyed reported rising customer demand and improving business confidence in February, due to lower economic uncertainty, fewer supply shortages and falling inflation.

Chris Williamson, chief business economist at S&P Global Market Intelligence, said: “While many companies continue to report tough operating conditions, especially in the manufacturing sector, 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.

“However, while the data suggest that near-term recession odds have fallen considerably, elevated inflation pressures clearly remain a concern, especially in the service sector.

"As such, the resilience of the economy and the stickiness of the survey’s inflation gauges add to the likelihood of the Bank of England tightening policy further, and potentially more aggressively, which may dampen future growth expectations and suggests that the possibility of recession later in the year should not be ruled out.”

Total volumes of new work received by UK private sector businesses rose at the strongest pace since May 2022.

Read more: UK government posts unexpected budget surplus in January

Input cost inflation eased for the third month running in February, with manufacturers recording a particularly marked slowdown in price pressures, S&P Global said.

The most commonly cited sources of cost inflation were higher wages, greater energy bills, and exchange rate depreciation against the US dollar. Meanwhile, lower purchase prices mostly reflected reduced fuel costs and falling shipping rates

Capital Economics UK economist Ashley Webb said the sharp rebound in the flash UK composite PMI in February "suggests the economy continued to remain resilient to the dual drags from high inflation and high interest rates".

However, he doubts this will last "as the drag from higher interest rates intensifies, triggering a recession this year".

He said: “Overall, the PMIs suggests that the resilience in economic activity from last year continued at the start of this year.

“But given our view that the Bank of England will raise interest rates further, from 4% now to a peak of 4.5%, we still expect the economy to slip into recession before long.”

February brought another “steep increase” in average prices charged by private sector companies, with this rate of inflation only slightly lower than at the start of the year.

“Lower prices charged inflation was led by the manufacturing sector. The latest rise in factory gate prices was the weakest since January 2021 and much softer than seen in the service economy,” the S&P Global report said.

“Many service providers suggested that rising staff salaries had led to a sustained increase in their prices charged,” the report added.

Read more: UK inflation falls for third straight month but remains close to 40-year high

Rhys Herbert, senior economist at Lloyds Bank, said: “The economy seems to have performed better than the PMI data implied over the autumn and winter months.

“Many expected the UK to be in recession by now, with the PMI now showing the end of a consistent trend of contraction over seven months.

“However, official figures suggest that so far least we've narrowly avoided recession.

“Even that economic picture is nothing to celebrate, particularly as there is little reason to expect a drastic improvement anytime soon.

“However, the ongoing slowdown in inflation may be enough of catalyst for growth to continue to keep us out of recession territory.”

Watch: What is a recession and how do we spot one?

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