UK economy shrugs off Omicron slump as private sector rebounds to eight-month high

The UK economy bounced back strongly in February from an Omicron-induced slump with key economic indicators surging as final COVID restrictions are eased.

According to the latest figures from IHS Markit business activity was the strongest since last June, led by a recovery in consumer spending on travel, leisure and entertainment.

IHS Markit's composite purchasing mangers' index (PMI), which comprises services and manufacturing activity, jumped to 60.2 from 54.2 in January, marking an eight-month high.

Any value over 50 indicates an overall expansion in the services sector, a value of 50 means that there is no change in activity and anything below 50 is a contraction.

Britain's largest sector, services, rose to an eight-month high this month as services firms benefitted from the easing of Plan B measures boosting optimism in the economy.

The industry, which includes retail, hotels, banks and restaurants rose to 60.8 in February. Services PMI was 54.1 in January 2022, up from 53.6 in December 2021, after sales, new orders and employment numbers in the sector soared, with input costs and energy bills also increasing as inflation ticked higher.

As the backbone of the UK economy, it accounted for 80% of gross domestic product (GDP) in 2020 and 82% of employment between April and June last year.

"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 IHS Markit.

The closely watched PMI surveys also showed high inflation persisted in February, as higher wages, energy bills and raw material costs all contributed to businesses’ rising operating costs.

Output growth in the services sector exceeded that seen in the manufacturing industry, with supply chain issues showing signs of easing.

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The equivalent measure for manufacturing reached 56.7 — a seven-month high. This was up from 54.5 in January. Manufacturing output was unchanged from January at 57.3, down slightly from 57.9 in December 2021 but still signalling growth overall.

Britain's goods exports tumbled in February, compared to accelerating export growth in the eurozone economy.

Williamson said 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".

The economist added that today's figures make it "increasingly likely" that the Bank of England will hike interest rates again as UK economic growth surges in February as pandemic containment restrictions are withdrawn.

Separate IHS Markit figures released on Monday showed that the eurozone economy rebounded in February, despite soaring prices. New orders in the region rose at the fastest pace in nearly 15 years as firms struggle to meet demand.

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Its flash composite PMI for the eurozone, seen as guide to overall economic health, jumped to a five-month high of 55.8 in February up from 52.3 in January. Analysts were expecting 52.7.

Manufacturing PMI fell to 58.4 from 58.7 in January — a two-month low. Meanwhile, manufacturing output in the eurozone came in at a five-month high to 55.6, compared to 55.4 in January.

"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," Williamson said.

France recorded the biggest growth bounceback, reaching the highest since last June, though growth in Germany also picked up to the fastest since last August.

But, while an easing of supply delays helped to reduce raw material input cost inflation, persistent cost pressures caused by rising wages and energy bills saw the sharpest rise in average prices charged for goods and services in the survey’s history. Price rises in the bloc's services industry hit a record high while those in manufacturing rose at a near-record rate.

Future expectations, new orders and jobs growth also improved.

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