The British economy’s post-election bounce gained strength in January as services companies enjoyed the strongest influx of new orders since mid-2018, a closely watched survey showed on Wednesday.
The IHS Markit/CIPS UK Services Purchasing Managers’ Index (PMI) rose to 53.9 January, a full point higher than a preliminary reading for the month and up from 50.0 in December.
It was the strongest reading since September 2018 and higher than all forecasts in a Reuters poll of economists, which had pointed to a reading of 52.9.
Sterling rallied against the dollar and the euro after the survey and 10-year gilt yields rose to their highest in nearly two weeks, as markets decided the Bank of England was unlikely to cut interest rates in the first half of the year.
Last week, the BoE said it saw signs of a post-election pick-up in growth as its policymakers voted against an immediate rate cut to help the economy, which slowed to a near-crawl in late 2019.
Data company IHS Markit, which produces the PMI, stuck to its view that the economy looks on track for quarterly growth of around 0.2 per cent at the start of this year.
The survey showed new business in services companies grew last month at the fastest rate since June 2018.
“The survey fuels our belief that the economy could conceivably achieve GDP growth of 0.4 per cent quarter-on-quarter in the first quarter of 2020,” Howard Archer, economist from the EY ITEM Club consultancy, said.
“However, a concern for the economy is that the upside for business willingness to commit to investment and major projects may be limited by still significant concerns and uncertainties over the UK-EU relationship,” Archer added.
Britain, fresh out of the European Union, hopes to have a trade deal with the EU by the end of the year — a target that many analysts view with scepticism.
Prime Minister Boris Johnson has pitched two models for his country’s trade ties with the EU after Brexit: preferably a deal based on the EU’s accord with Canada or, failing that, the basic terms that the EU has with Australia. Business groups oppose the latter approach.
For now, the signs of growth appear clear.
The services PMI’s gauge of business expectations rose to its highest since May 2015.
“However, this sub-index was the only measure in the final UK Services PMI dataset to drop since the earlier ‘flash’ estimate, which may suggest that business expectations tailed off towards the end of the month,” Williamson said.
While businesses have cheered up in recent weeks, consumer reactions have been more mixed. Official data showed retail sales fell unexpectedly in December, and on Wednesday industry data showed car sales were down 7 per cent in January from a year ago.
The composite PMI, which combines the services and manufacturing output indexes, rose in January to 53.3 from the earlier flash reading for the month of 52.4 and December’s 49.3, reaching its highest since September 2018.