British companies reported the first growth in seven months, a surprise that boosts the chances the economy escapes a recession for now.
(Bloomberg) — British companies reported the first growth in seven months, a surprise that boosts the chances the economy escapes a recession for now.
A survey of purchasing managers from S&P Global also showed a “sustained increase” in prices that adds to pressure on the Bank of England to raise interest rates again. Its composite reading of private sector output rose to 53 in February from 48.5 the month before, well above the 49 reading economists had expected.
The figures both reduce the risk of a recession early this year and increase the chances that the BOE will have to step up its fight against inflation. Investors had begun speculating on when the central bank will pivot away from its quickest cycle of hikes in three decades.
“The survey’s inflation gauges add to the likelihood of the Bank of England tightening policy further, and potentially more aggressively,” Chris Williamson, chief business economist at S&P Global Market Intelligence, said in a statement Tuesday. “ While the data suggest that near-term recession odds have fallen considerably, elevated inflation pressures clearly remain a concern.”
The pound jumped after the announcement, hitting the day’s high against the dollar and the euro, while UK gilts fell, led by losses in shorter maturities.
“This will add to the pressure the BOE is already under to raise interest rates further,” said Stuart Cole of Equiti Capital. “The risk that the BOE may have to engineer a recession to bring CPI back to target.”
What Bloomberg Economics Says …
“The surprise gain in February’s composite PMI chimes with our view that it’s touch and go whether the UK economy slips into a technical recession or not this year. The reading points to modest growth in the first quarter and suggests companies are becoming more upbeat about the outlook despite higher interest rates.”
—Ana Andrade, Bloomberg Economics. Click for the REACT.
There were few signs of inflation retreating in the S&P survey. It showed the strongest pace of hiring in four months and that companies expect to raise both wages and prices. Average prices charged eased only slightly.
“Many service providers suggested that rising staff salaries had led to a sustained increase in their prices charged,” the report said.
The sharp uptick in February was driven by rising customer demand and increasing confidence among business executives after a subsidence in the market turmoil triggered by then-Prime Minister Liz Truss’s budget plan.
Renewed confidence drove expectations for activity over the next 12 months to the highest level in almost a year.
“The broader business mood has been buoyed by signs of inflation peaking, supply chains improving and recession risks easing,” Williamson said.
Services output rose at a pace of 53.3 this month on S&P’s reading, the strongest in eight months and above the threshold of 50 indicating growth.
Manufacturing production rose for the first time since June after the fastest improvement in supplier delivery schedules since 2009, an indication that the supply chain bottlenecks that followed the pandemic are dissipating rapidly.
–With assistance from Alice Gledhill and Naomi Tajitsu.
(Corrects lead and headline to show seven months.)
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