Britain’s economy ended 2023 on a stronger footing than previously thought, according to a survey of businesses, amid other signs that the Bank of England’s high interest rate campaign might not trigger a recession.
With Prime Minister Rishi Sunak hoping for better economic news before an election expected later this year, Thursday’s data suggested businesses and households are weathering the storm of high inflation and borrowing costs at a 15-year peak.
The final S&P Global/CIPS UK Services Purchasing Managers’ Index (PMI) rose to 53.4 in December, showing the sector grew more strongly in December than an initial reading of 52.7 and November’s 50.9.
Expectations for future activity rose to the highest since May.
“The further rebound in December’s PMI suggests a recession should be narrowly avoided,” Gabriella Dickens, senior UK economist at Pantheon Macroeconomics, said.
“The survey, however, adds weight to our view that activity should rise gradually over the course of 2024.”
Data from the Bank of England also released on Thursday showed net borrowing by British consumers was the highest in nearly seven years in November – when retail sales leapt – and lenders approved the most mortgages since June.
Sterling rose against the dollar and the euro after the PMI and the BoE data was published. Investors continued to expect a first BoE interest rate cut in May.
A separate survey by the British Chambers of Commerce showed companies were a bit more optimistic about sales growth this year after a largely flat 2023, although they remained wary about increasing investment.
Sunak says he will get the economy growing more strongly but official data last month suggested it could already be in a mild recession – as defined by two consecutive quarters of economic contraction – after it shrank between July and September.
The opposition Labour Party, which is far ahead of Sunak’s Conservatives in opinion polls, has sought to paint itself as the best guardian of Britain’s economy.
“I’ve read that the Tories want to fight the election on this terrain….But let me tell you, what used to be their strength is now their weakness,” Labour leader Keir Starmer said in a speech on Thursday.
PAY PRESSURES REMAIN
Tim Moore, economics director at S&P Global Market Intelligence, said the PMI data showed the services sector ended 2023 on a high, helped by hopes of BoE rate cuts and a stronger world economy.
“However, many firms continued to cite challenging underlying business conditions due to the stagnating UK economy and strong pressure on margins from rising labour costs,” Moore said.
Higher wages – a worry for the BoE – helped speed up the pace of input inflation for a second month in a row despite lower transport and raw material costs. In response, companies increased their prices by the most since July.
The BoE is facing calls from business leaders, worried about the economy, to cut interest rates. Investors are pricing in a first reduction in Bank Rate in May.
The composite PMI, combining the services survey with a weak reading of the manufacturing sector published on Tuesday, hit its highest since May at 52.1 in December from 50.7 in November.
Services firms saw the strongest growth in new orders in six months although export demand rose only marginally. A fall in staffing numbers represented the third drop in four months.
(Reuters)