Hopes that the UK economy can live through surging inflation and a downturn in the retail sector, were given a boost by a survey showing business activity at its highest level for a year.
The closely watched S&P Global/CIPS Purchasing Managers Index (PMI) index rose from 52.2 in March to 53.9 in April, the third consecutive month of recovery. A reading above 50 points to an increase in output and suggests GDP grew during the month.
S&P Global upgraded the UK’s credit outlook to ‘stable’ from ‘negative’, reversing the rating it gave following September’s mini-Budget from then Prime minister Liz Truss and her chancellor Kwasi Kwarteng which had sent markets into a frenzy.
The rating agency also reaffirmed its AA rating on UK debt, while predicting economic output to shrink by 0.5 per cent this year, before growing by an average of 1.6 per cent a year between 2024 and 2026.
“The government’s decision to abandon most of the unfunded budgetary measures proposed in September 2022 has bolstered the fiscal outlook,” S&P said. The index came out on the same day as disappointing official retail sales showing a 0.9 per cent fall in March, a dramatic turnaround from growth of 1.1 per cent in February. Economists blamed cold and wet March weather and shortages of fruit and vegetables in supermarkets for the worse than expected data.
The mixed statistical messages will make it even harder for the Bank of England’s Monetary Policy Committee to make its decision on interest rates in coming months. However, a quarter point rise to 4.5 per cent in May followed by a further rise to 4.75 per cent in June is seen by the financial markets as highly likely. The latest rise in the flash PMI index was driven by the dominant services sector. Its index of activity jumped from 52.9 to 54.9, a year high.
Chief business economist at S&P Global Market Intelligence, Chris Williamson, said: “For now the key takeaway is that the economy as a whole is not only showing encouraging resilience but has gained growth momentum heading into the second quarter. The latest PMI reading is broadly indicative of GDP rising at a robust quarterly rate of 0.4 per cent.
The April data also pointed to the slowest increase in input costs for companies for more than two years as fuel and energy prices ease from the crippling highs seen a year ago in the wake of Russia’s invasion of Ukraine. However, survey respondents reported that there has been no let-up in wage inflation, particularly in the services sector.
New order growth for services companies reached a 13-month high buoyed by a post-pandemic surge in spending on travel, leisure and entertainment. UK economist at forecaster Capital Economist, Ashley Webb, said: “Overall, April’s flash composite PMI suggests that the recent resilience in activity continued into Q2 and inflationary pressures may be easing more slowly.”
He added: “We think the Bank (BoE) will need to raise rates further and keep them high for all of this year to reduce inflation all the way to the 2 per cent target.” The current gloomy retail figures contrasted with a strong bounce in consumer confidence in analyst GfK’s latest index. It reported a six-point rise in the index to minus 30 in April.
Joe Staton at GfK, the largest German market research company, said: “As food and energy prices continue to rise and inflation eats into wages the cost of living crisis is painful day-to-day reality for many. But are all consumers buckling under the pressure? On the evidence of April’s figures the answer is no.” (The writer is our foreign correspondent based in the UK)
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