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UK economy picks up speed but Red Sea crisis hits factories

Published 01/24/2024, 04:33 AM
Updated 01/24/2024, 08:21 AM
© Reuters. A general view of the financial district of London is seen in London, Britain, October 19, 2016. REUTERS/Hannah McKay/Files/ File Photo

By William Schomberg

LONDON (Reuters) - Britain's economy started 2024 on a stronger footing, according to a survey of businesses published on Wednesday that prompted investors to reduce their bets on the Bank of England moving quickly to cut interest rates.

But while services firms grew more rapidly this month, Britain's long-struggling manufacturers were hit by the inflationary impact of tensions in the Red Sea, the Purchasing Managers' Index (PMI) showed.

Chris Williamson, S&P Global Market Intelligence's Chief Business Economist, said firms overall were bolstered by hopes of faster economic growth, falling inflation and lower borrowing costs.

"However, the surprising strength of growth in January, which has exceeded forecasts, may deter the Bank of England from cutting interest rates as soon as many are expecting, especially as supply disruptions in the Red Sea are reigniting inflation in the manufacturing sector," he added.

The preliminary S&P Global/CIPS UK Composite PMI, spanning services and manufacturing firms, rose to 52.5 in January, its highest in seven months and up from December's 52.1.

Economists polled by Reuters had forecast a slightly smaller increase to 52.2.

The BoE is due to announce its latest decision on interest rates and its outlook for the economy on Feb. 1. Many investors and analysts have said they expect it will soften its stance against talking about cutting rates from nearly 16-year highs.

But investors took Wednesday's PMI as a sign that the BoE would be in no hurry to lower borrowing costs. Rate futures still showed investors broadly expecting four quarter-point rate cuts in 2024 but with less conviction than earlier in the day.

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ING economist James Smith said the recovery in Britain's services sector contrasted with weakness in the euro zone where the composite PMI remained in negative territory in January.

"The issue for the Bank of England is that inflation is also proving sticky, and the PMI highlights the disruption in the Red Sea," Smith said, adding he expected the BoE to only cut rates from August.

That would probably still be in time to lower borrowing costs for households before a national election that Prime Minister Rishi Sunak has suggested he will hold later in 2024.

Allan Monks at JP Morgan said the PMI surveys had sent false signals about growth in the past, but the economy was no longer flirting with recession as it was in late 2023, which could "give the BoE another reason to be cautious when considering when and how quickly to deliver rate cuts".

A CASE FOR CAUTION

Separate data published earlier on Wednesday also suggested the central bank might move cautiously.

Pay awards from British employers held at their highest sustained level in over 30 years in the last three months of 2023 although deals struck in early 2024 suggest pay growth has peaked, human resources information provider XpertHR said.

The PMI's headline measure of activity among services firms, climbed to 53.8, an eight-month high.

By contrast, manufacturing continued to shrink although the pace of contraction slowed a bit to 47.3 from 46.2, its closest to the no change level of 50.0 since last April.

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Factories reported the first growth since April in input costs as the re-routing of ships away from the Red Sea added to freight costs. Delivery times rose for the first time in a year. But a rise in prices charged by manufacturers was only modest.

Separate figures from the Confederation of British Industry showed factories saw their orders fall at the sharpest pace since July 2020.

In the PMI survey, the pace of cost increases for services firms - chiefly wages - grew by the least in three months.

Prices charged by firms overall increased at their weakest pace since October 2023.

There were other positive signs in the "flash" January PMI including the first growth in employment in five months, the strongest increase in new work since last May and the most optimism about the outlook also since last May.

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