UK business activity rises faster than expected in December

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UK business activity rose at the fastest pace in six months in December, according to a closely watched survey that suggests economic output might not fall in the final quarter.

The S&P Global/Cips flash UK PMI composite output index, a measure of the health of the manufacturing and services sectors, unexpectedly rose to 51.7 in December, from 50.7 in November — the fastest rise in private sector business activity since June.

A reading above 50 indicates a majority of businesses reporting an expansion.

The results exceeded expectations, with economists polled by Reuters forecasting the index would remain broadly unchanged at 50.9.

In another sign of tentative optimism, separate data published by the research company GfK on Friday showed that UK consumer confidence rose to a three-month high in December.

The PMIs, a more timely indicator of activity than official statistics, suggest that the economy could avoid a contraction in the final quarter of the year.

Data published by the Office for National Statistics on Wednesday showed that the UK economy shrank 0.3 per cent between September and October, raising expectations of a contraction across the final quarter; today’s numbers have eased some of those fears.

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.”

On Thursday, the Bank of England forecast that the UK economy would stagnate but avoid a contraction in the final three months of the year, a downward revision from its November estimate of a 0.1 per cent expansion.

But the central bank kept interest rates at a 15-year high of 5.25 per cent and warned that “further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures”.

The PMIs showed that prices of inputs rose at the fastest pace since August, driven by higher price pressures in the services sector, which will be a concern for policymakers. The increase was widely linked to higher salaries and led to another robust increase in output prices.

“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,” said Alex Kerr, economist at Capital Economics.

The increase in the UK PMI index was driven by the services sector, which rose to 52.7 in December from 50.9 in the previous month. Williamson in part attributed the rise to “hopes of lower interest rates in 2024”.

Despite cautious comments on rates from policymakers, markets are pricing four cuts by the end of next year.

In contrast with services, manufacturing activity decreased for the 10th month running, and at a notably faster pace than in November, with the index dropping to 46.4 from 47.2 in the previous month. Many goods producers reported a slide in output volumes due to overstocked customers.

John Glen, Cips chief economist, said: “A revival in the services economy is helping the UK’s private sector end the year on a more positive note. However, the continued struggles in manufacturing add a tone of caution as we look ahead to 2024.”