Tepid growth persisted across British businesses at the beginning of 2025, with employment and optimism declining while price pressures increased, as indicated by a survey closely monitored by the Bank of England.
The preliminary "flash" reading of the UK S&P Composite Purchasing Managers' Index (PMI), released on Friday, inched up to 50.9, a three-month high, from 50.4 in December. Economists had anticipated a further dip in January to 50.0, the threshold between growth and contraction.
The survey's findings aligned with other indicators of subdued growth and a softening job market following the implementation of payroll tax hikes for businesses by Finance Minister Rachel Reeves in October.
A separate report published on Friday revealed a significant decrease in sales volumes in January. British government bond prices fell post the PMI release, while the British pound edged up against the dollar.
According to economist Elias Hilmer from consultancy Capital Economics, "Today's data release won't alleviate the Bank of England's concerns about the weakness of activity." He forecasts a reduction in interest rates from 4.75% to 4.50% in February, albeit gradually thereafter due to increasing price pressures.
Many firms attributed the decline in hiring to the rise in social security contributions announced by Reeves. Job losses, as reported by the PMI over the past two months, were the most pronounced since the global financial crisis in 2009, excluding the COVID period.
Optimism among companies dropped to its lowest level since late 2022, following former Prime Minister Liz Truss's impactful "mini-budget."
Discussing the reemergence of inflation pressures, Chris Williamson, chief business economist at S&P Global Market Intelligence, highlighted a potential stagflationary scenario, posing a dilemma for the BoE's policy decisions.
The PMI's metrics on business costs and selling prices surged to their highest levels since mid-2023. This factor is likely to be deliberated by the BoE before its interest rate decision on Feb. 6.
Input costs are rising more rapidly in Britain compared to Germany, France, and Japan. Investors foresee two to three quarter-point rate cuts by the BoE in 2025, with an initial adjustment expected in February due to persistent inflation pressures.
Official data indicates stagnation in the British economy in the last quarter of 2024. S&P Global reported that the UK services PMI rose to 51.2, a three-month high, while manufacturing continued to contract for the fourth consecutive month, with factory job cuts at their swiftest pace since February 2024. Nonetheless, the sector's PMI rose to 48.2 from 47.0.