UK business activity growing faster than forecast in sign of ‘renewed momentum’

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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 pressure eases and markets expect the BoE to cut interest rates from their current 15-year high of 5.25 per cent later this year.

Chris Williamson, 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”.

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.

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.

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”.

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.