British business sentiment best in over 12 months

PMI shows strong January services growth


January looks set to be the best month for British companies in more than 12 months, according to a recent PMI survey.

The early readings of the IHS Markit/CIPS UK Purchasing Managers’ Index (PMI) have revealed a marked improvement in the British business sentiment. Most importantly the United Kingdom’s significant services sector returned to growth in January for the first time in four months.

The PMI suggested that the British economy will likely recover from the lull it experienced in late-2019 and grow by around 0.2 per cent in quarterly terms. The composite PMI, which combines services and manufacturing indices, rose from 49.3 to 52.4, its highest point since September 2018. The PMI for the services sector rose from 50.0 last month to 52.9 from 50.0, also its highest level since September 2018.

The PMI figures were not uniformly rosy, however. They revealed that British manufacturing is expected to decline for the ninth month in a row. Nonetheless, with new orders increasing for the first time since April and the rate of contraction lower than in previous months, the sector could be set for a recovery in the months to come.

This improvement is largely a consequence of December’s general election. The Labour leader Jeremy Corbyn had pledged to increase taxes on small, medium and large sized business and promised to nationalise British rail networks, broadband and energy services.

With Labour suffering its worst defeat since 1935, the immediate possibility of such radical economic changes was eliminated. Prime Minister Boris Johnson’s victory has also provided businesses with greater certainty as to the direction of Brexit, although the full details of Britain’s relationship with the European Union have not yet been hammered out.

The buoyant mood of British business could reduce the possibility of the Bank of England (BoE) cutting interest rates yet further next week. Concerns as to the strength of the labour market had led some at the BoE to vote for lower borrowing costs, while a number of figures, including outgoing Governor Mark Carney, have discussed the possible need for further economic stimulus in the near future.

IHS Markit’s chief business economist, Chris Williamson, said: “It seems likely that the rise in the PMI kills off the prospect of an imminent rate cut by the Bank of England, with policymakers taking a wait-and-see approach as they assess the performance of the economy in the post-Brexit environment.”

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