UK Services Sector Shows Resilience, Eases Recession Fears

The Purchasing Managers' Index (PMI), a key economic indicator, contributed to a surge in the value of the British pound when it was published.

In the United Kingdom, the services sector has displayed a notable uptick in growth this month, providing a glimmer of hope that the economy may manage to stave off a recession, at least for the time being.

This encouraging news was unveiled in a survey released just one day after the Bank of England had indicated its intention to maintain high interest rates.

The Purchasing Managers’ Index (PMI), a key economic indicator, contributed to a surge in the value of the British pound when it was published.

Economists contended that the PMI findings supported the Bank of England’s stance against considering cuts to borrowing costs.

The S&P Global/CIPS UK Composite PMI, encompassing both services and manufacturing firms, surged to 51.7 in the preliminary reading for December, marking the highest level seen in the past six months.

This was a significant improvement from the November reading of 50.7, which had raised concerns. Economists polled by Reuters had initially predicted a more modest increase to 50.9.

This robust performance in the UK contrasted with the Eurozone, where the PMI survey for December indicated a worsening economic situation, suggesting a possible recession in that region.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, commented on the findings, stating, “The UK economy continues to dodge recession with growth picking up some momentum at the end of the year to suggest that GDP stagnated over the fourth quarter.”

He also highlighted the duality of the British economy, with manufacturing showing sharp contraction while services displayed improved performance.

Financial services benefited from optimism surrounding lower interest rates in 2024, according to Williamson. Despite the Bank of England maintaining current borrowing costs, financial markets are anticipating rate cuts in the coming year.

Within the services sector, business activity experienced a notable increase, with the gauge climbing to 52.7 from 50.9, the highest reading since June.

This was only the second time since July that the index surpassed the 50.0 growth threshold. However, manufacturing’s reading declined to 46.4, reversing some gains from November and marking the 17th consecutive month of contraction.

While services saw solid growth in new business, manufacturing orders decreased, resulting in overall order growth for the first time in six months.

Staffing levels, however, continued to decline for a fourth consecutive month.

The survey provided some relief to the Bank of England by indicating a slight slowdown in services price inflation, a closely monitored factor.

Despite easing to 57.7 from 58.2, the gauge of output price growth in the sector remained historically high.

Economists suggested that the persistence of price pressures would reinforce the central bank’s commitment to maintaining high interest rates.

Still, some cautioned that the decline in hiring and weaker increases in prices charged by firms, if sustained, could potentially lead to the first Bank of England rate cut in the second quarter of 2024.

Although this PMI data and other positive signs, such as increased consumer confidence and hints of stability in the housing market, offer some optimism, the broader economic picture for the UK remains one of sluggish growth.

Recent GDP data revealed a 0.3% contraction in October, leaving overall output stagnant since January.