LONDON, (Reuters) – The UK economy demonstrated further signs of recovery in February, according to a survey released on Friday, though persistent job cuts – particularly within the services sector – raise concerns about the sustainability of the expansion. The rebound, which began in January, is occurring alongside a challenging environment for businesses grappling with the impact of recent tax changes implemented by the Labour government.
PMI Signals Sustained, Though Fragile, Growth
The S&P Global UK Composite Purchasing Managers’ Index (PMI) rose to 53.9 in February, a preliminary report showed, up from 53.7 in January. This marks the highest level since , predating the current administration led by Prime Minister Keir Starmer. A PMI reading above 50.0 indicates economic expansion, while a figure below that threshold signals contraction.
“The early PMI data for February bring further signs of an encouraging start to the year for the UK economy,” said Chris Williamson, S&P Global chief business economist. The surveys for January and February collectively suggest potential economic growth of approximately 0.3% in the first quarter of . This would represent a notable improvement compared to the 0.1% expansion recorded in the final quarter of .
Labour Market Weakness and Policy Implications
Despite the positive momentum in the headline PMI figures, a significant undercurrent of concern revolves around the labour market. The survey highlighted a sharp decline in staffing levels, particularly within the services sector. Several companies cited increased social security payments – introduced by Chancellor Rachel Reeves in – as a contributing factor to redundancies and hiring freezes. Interestingly, some firms are responding to these increased costs by investing in technology as a means of achieving growth without expanding their workforce.
The Bank of England (BoE) will likely take note of these developments. Williamson suggests that policymakers will be encouraged by the stronger economic growth, but the relatively modest price pressures and ongoing weakness in the labour market could fuel calls for further interest rate cuts. Investors are widely anticipating a resumption of rate cuts in , as the central bank gains confidence from slowing inflation and shifts its focus towards supporting employment.
Sectoral Divergence and Export Demand
The services PMI edged down slightly to 53.9 from 54.0 in January, while the manufacturing sector experienced a more substantial improvement, with its PMI reaching an 18-month high of 52.0, up from 51.8. This divergence suggests that manufacturing is beginning to contribute more meaningfully to overall economic growth.
Total new work increased at the strongest pace since , driven in part by a surge in new orders from abroad. The rise in new work for manufacturers from overseas was the fastest in four-and-a-half years, indicating strengthening external demand.
Price Dynamics and Cost Pressures
The survey also provided insights into price dynamics. Prices charged by businesses rose at the fastest pace since , suggesting that companies are beginning to pass on increased costs to consumers. However, input cost burdens, while still elevated, increased at the slowest pace in three months, offering a glimmer of hope that inflationary pressures may be easing.
Context and Broader Economic Outlook
The latest PMI data builds upon recent indicators suggesting a gradual improvement in the UK economic outlook. However, the 0.1% GDP growth recorded in the final quarter of – as reported by the Office for National Statistics (ONS) on – remains subdued. This modest growth rate falls short of the ambitious targets set by the Labour party prior to the election, and presents a challenge for Chancellor Reeves as she seeks to deliver on her economic promises.
The combination of rising export demand, improving manufacturing activity, and easing input cost pressures provides a cautiously optimistic outlook for the UK economy in the near term. However, the persistent weakness in the labour market, coupled with the impact of higher taxes on the services sector, represents a significant headwind that could limit the pace of recovery. The BoE’s upcoming decisions regarding interest rates will be crucial in navigating these complex economic forces.
