Britain’s economy roars back to life in February but inflation pressure persists

Britain’s economy bounced back in February, with private sector activity at its strongest in eight months after consumer spending on travel, leisure and entertainment roared back to life as the threat posed by the Omicron variant of the coronavirus eased off.

The IHS Markit/CIPS composite Purchasing Managers' Index rose to 60.2 in February from 54.2 in January, its highest level since June 2021 eight months. However, the resurgence was accompanied by intensifying inflation pressure, with costs rising at the second-fastest pace on record.

“With the PMI’s gauge of output growth accelerating markedly in February and cost pressures intensifying to the second highest on record, the odds of an increasingly aggressive policy tightening have shortened, with a third back-to-back rate rise looking increasingly inevitable in March,” said Chris Williamson, chief business economist at Markit.

Traders are pricing in a 25 basis-point interest-rate increase when the Bank of England meets in March, with the strong possibility of a 50 basis-point rise, a move unheard of since the central bank gained independence in 1997.

With headline inflation at a 30-year high of 5.5 per cent in January and expected to peak at 7.25 per cent in April, according to the BoE, more than triple the bank’s target, policymakers are expected to deliver a series of rate rises this year that will drive up benchmark borrowing costs to about 2 per cent by the end of 2021.

The move comes as British households face a cost-of-living crunch amid rising energy prices and higher tax.

Britain's economy had just returned to its pre-pandemic size before it was hit by the Omicron variant in December.

As a result, the PMI index sank to a 10-month low of 53.6 in December when Britons were advised to work from home due to Omicron and many chose to cut back on socialising in the run-up to Christmas.

February's rise was driven by an increase in the flash services PMI to 60.8, from 54.1 in January, while the manufacturing PMI was unchanged at 57.3.

“Private sector companies reported another steep increase in incoming new work in February,” IHS Markit said.

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

Monday's PMI data also showed the composite input cost index rose to 81.8 from 80.2 — the second highest reading on record after November's 83.2. Higher wages, energy bills and raw material costs all contributed to rising operating expenses.

Hiring rose at the fastest rate since October, with tightness in the employment market — where there is a record number of job vacancies — one of the main reasons why the BoE fears that high inflation could be slow to dissipate.

The eurozone economic recovery also rebounded sharply this month as an easing of coronavirus restrictions gave a boost to the bloc's dominant service industry, a survey showed. However, consumers faced prices rising at a record rate.

As the Omicron coronavirus variant swept across Europe, some governments reimposed measures to contain its spread. With large parts of the population now vaccinated, many of those measures have been eased.

IHS Markit's Flash Composite Purchasing Managers' Index, considered to be a guide to overall economic health, jumped to a five-month high of 55.8 in February, from 52.3 in January, with the PMI for the service industry rising to 55.8, from 51.1, a five-month high.

“The eurozone economy regained momentum in February as an easing of virus-fighting restrictions led to renewed demand for many consumer services such as travel, tourism and recreation, and helped alleviate supply bottlenecks,” said Chris Williamson, chief business economist at IHS Markit.

Richard Amaro, senior economist at Oxford Economics, said the February surge was driven by much faster growth in services and very solid trends in manufacturing, despite some slight easing in the pace of growth in February.

“The forward-looking indicators were also encouraging as year-ahead sentiment rose in February to its strongest since June 2021,” said Mr Amaro.

“The weak start to the year means that eurozone GDP growth is likely to remain modest in Q1 [the first quarter], but today’s PMI results chime with our forecast that solid growth will resume in Q2.”

Andrew Kenningham, chief Europe economist at Capital Economics, also expects the eurozone economy to expand at a reasonable pace in the first quarter and accelerate in the next two quarters as tourism, travel and hospitality continue to normalise.

“But inflationary pressures will stay very strong for many months yet,” he said.