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UK Economy Recovery Accelerates in February show PMIs, Locking in a March Rate Hike

  • UK economy in strong rebound
  • Underpins Bank of England rate hikes expectations
  • But inflationary pressures remain
  • And Brexit weighs on export trade

UK economic rebound underpinned by services sector recovery

Image © Adobe Stock

The UK's economic rebound accelerated faster than expected in February according to a leading survey, which noted "a swift rebound in UK economic conditions".

The IHS Markit PMI survey for the UK showed both the manufacturing and services sectors expanded in February, with the Services PMI printing at 60.8, beating expectations for a reading of 55.5 and up on January's 54.1.

The Manufacturing PMI read at 57.3, unchanged on January but up a touch on the consensus estimate of 57.2.

The Composite PMI - which rebalances the readings to give a more accurate snapshot of the broader economy - read at 60.2, ahead of consensus at 55.0 and January's 54.2.

"The U.K. economy is rebounding from Omicron at a fair clip," says Gabriella Dickens, Senior UK Economist at Pantheon Macroeconomics. "The forward-looking components of Markit’s survey suggest growth will remain brisk over the coming months."

Composite PMI

Above: UK Composite Output Index (left) and Gross domestic product (GDP)% qr/qr (right).

The rebound in UK economic activity was the fastest recorded in eight months and follows a slowdown caused by Omicron disruptions at the turn of the year.

A recovery in consumer spending on travel, leisure and entertainment were major contributors to the bounce back.

IHS Markit reports hiring was strong as staff recruitment accelerated again in February in response to increased workloads and favourable growth projections.

The rate of private sector employment growth was the fastest since October 2021, which was largely driven by stronger job creation in the service economy.

Employment index

Above: UK Composite Employment Index.

The findings come ahead of the March 17 Monetary Policy Committee meeting at the Bank of England, where it is expected another interest rate rise will be confirmed.

Indications that the economic rebound is solid will bolster the MPC's decision to raise rates and signal further hikes are likely, which analysts say is a supportive dynamic for Pound Sterling's outlook.

"The combination of reviving economic activity and widespread price increases suggests that the MPC almost certainly will raise Bank Rate to 0.75% at next month’s meeting," says Dickens.

"The PMIs suggest the economy shrugged off the hit from Omicron. And the tentative signs of easing supply disruptions and price pressures are encouraging too. But with CPI inflation far above the Bank of England’s 2% target and rising, we still expect Bank Rate to reach 1.25% by the end of this year and 2.00% by the end of next year," says Adam Hoyes, Assistant Economist, at Capital Economics.

But there remain some concerns for the outlook as inflationary pressures are acute and exports continue to struggle, with IHS Markit saying Brexit-related trade issues remain a factor.

IHS Markit's Chief Business Economist Chris Williamson says UK goods exports slumped in February, contrasting with accelerating export growth in the eurozone.

"UK exporters are consequently underperforming their peers in the eurozone to one of the greatest extents seen over the past 15 years as Brexit adds to UK trading headwinds," says Williamson.

Nevertheless, IHS Markit reports production volumes in the manufacturing sector were helped by fewer raw material shortages and easing global supply chain pressures, according to survey respondents.

Easing of supply chain constraints are expected to ultimately translate into easing cost-push inflationary pressures later in 2022.

Waiting times improving

Above: UK Manufacturing PMI Suppliers' Delivery Times Index.

The findings come on the day the Government is expected to detail how the country intends to 'live with Covid' and announce a complete removal of all Covid-related legislation.

Stronger client demand was widely linked to improving confidence about the UK economic outlook and roll back of pandemic restrictions said IHS Markit.

Year-ahead business expectations meanwhile picked up for the third month, with businesses the most optimistic since May 2021.

IHS Markit says positive sentiment towards the business outlook was linked to a strong recovery in client demand after the Omicron wave, as well as long-term expansion plans and hopes that the worst phase of supply disruption has passed.

"The latest UK purchasing manager indices will tick a lot of boxes for Bank of England policymakers," says James Smith, Developed Markets Economist at ING Bank. "It’s yet another hint that Omicron has done very little lasting damage to the UK economy, and the data is consistent with what we’ve seen with just about every other high-frequency indicator."