- The UK economy has shown a promising start in 2024, with the private sector’s third consecutive month of acceleration, highlighted by an increase in the S&P Global/CIPS flash PMI to 52.5 in January.
- However, the article underscores the impact of the Red Sea crisis on UK firms, particularly in manufacturing, as longer supply chain wait times contribute to the fastest rate of cost inflation since March 2023.
The UK economy has kicked off the year on a positive note, as revealed by the latest S&P Global/CIPS flash UK Purchasing Managers’ Index (PMI), signaling a promising start. The index, a closely monitored indicator of private sector activity, rose to 52.5 in January, up from 52.1 in December, marking the third consecutive month of acceleration.
In particular, the services sector, a vital component of the UK economy, experienced another month of expansion, reaching an impressive eight-month high at 53.8. Respondents noted increased client confidence and a rebound in demand attributed to lower borrowing costs. However, the manufacturing sector, while improving, remained in contraction at 47.3, albeit reaching a nine-month high.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, expressed optimism about the survey’s findings, stating that it marks “a promising start to the year.” Gabriella Dickens, Senior UK Economist at Pantheon Macroeconomics, echoed this sentiment, stating that “the economy is quickly escaping the mild recession that it went into in the second half of last year.”
Despite these positive signs, the survey highlighted the adverse effects of the Red Sea crisis on UK firms. Manufacturing supply chains experienced longer wait times, resulting in the first increase in vendor delivery times since September 2022. This contributed to the fastest rate of cost inflation in the manufacturing sector since March 2023.
Service providers also faced rising costs, primarily due to robust wage growth, although input cost inflation in services slowed down, marking the slowest pace in three months. Williamson warned that persistently high wage growth and increased costs from the Red Sea could keep inflation around three or four per cent.
Despite concerns about the Red Sea crisis’s impact, business confidence reached its highest level since May of the previous year. The survey attributed this surge in confidence to positive signals for client spending, long-term business investment plans, and hopes of a broader economic turnaround.
However, economists sounded a note of caution regarding the threat of lingering inflation. Ashley Webb, UK economist at Capital Economics, expressed concern about the stickiness of price pressures, diminishing confidence in services CPI inflation returning to its long-run average of 3.5 per cent by the end of the year.
As the UK navigates through these economic dynamics, the Red Sea crisis continues to cast a shadow, serving as a reminder that challenges persist alongside promising signs of recovery.
