UK economy in better shape than thought

New figures show that Britain could narrowly side-step a widely predicted recession

London's financial district. Figures show an expansion for the UK's services sector and a slower contraction for manufacturing. Reuters

British businesses reported an unexpected bounce in activity this month, prompting some to consider if the UK might avoid a widely predicted recession later this year.

The preliminary "flash" reading of the S&P Global/CIPS UK Composite Purchasing Managers' Index jumped to 53.0 in February from 48.5 in January, above the 50 threshold for growth for the first time since last July.

It stormed past all the forecasts in a Reuters poll of more than 20 economists, which had pointed to a reading of 49.0.

"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," said Rhys Herbert, senior economist at Lloyds Bank.

The strength behind the number came from the UK's services sector, where the PMI figure rose to 53.3 in February from January's 48.7, the highest reading since June last year.

"The UK is finally picking up some momentum. The service sector, which dominates the UK economy, looks particularly resilient," said Guy Foster, chief strategist at RBC Brewin Dolphin.

"Much better than anticipated PMI data for February indicate encouraging resilience of the economy," said S&P Global chief business economist, Chris Williamson.

"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."

Factory activity continued to contract, but at a much reduced pace, with the manufacturing PMI increasing to 49.2 in February from 47.0 the month before, still below the crucial 50 figure, above which expansion is indicated.

"The risk of a '70s-style recession is receding," said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.

"However, with fresh industrial strife on the cards, further interest rate rises expected, and the housing market turning from a quiver to a shiver, a recession can’t be ruled out and at the very least we’ll be heading for an early noughties period of stagnation,‘’ she added.

Not all a bed of roses

Meanwhile, the view from the Confederation of British Industry was slightly bleaker.

Manufacturing output volumes fell at their fastest pace since September 2020 in the three months to February, according to the CBI’s latest Industrial Trends Survey.

Output fell in 11 out of 17 industrial sectors, largely driven by the motor vehicles and transport equipment, chemicals and paper, printing and media sectors.

“Conditions in manufacturing remain challenging, with output disappointing and order books having thinned out since late last year," said Anna Leach, Deputy Chief Economist at the CBI.

"However, if growth is going to return to the sector on a sustainable basis, then manufacturers need more than the boost some will receive from lower energy prices over the winter season."

The survey, which is based on the responses of 280 manufacturing firms, also found order books were "below normal", while stocks of finished goods were seen as broadly adequate.