LONDON, Jan 24 (Reuters) - Britain's economy started 2024 on a stronger footing, according to a survey of businesses published on Wednesday that prompted investors to pare their bets on the Bank of England moving quickly to cut interest rates.
But while services firms grew a bit more rapidly than expected this month, Britain's long-struggling manufacturers are now being hit by the inflationary impact of tensions in the Red Sea, the Purchasing Managers' Index (PMI) showed.
"Business activity and confidence are being in part driven by hopes of faster economic growth in 2024, in turn linked to the prospect of falling inflation and commensurately lower interest rates," Chris Williamson, S&P Global Market Intelligence's Chief Business Economist, said.
"However, the surprising strength of growth in January, which has exceeded forecasts, may deter the Bank of England from cutting interest rates as soon as many are expecting, especially as supply disruptions in the Red Sea are reigniting inflation in the manufacturing sector," he added.
The preliminary S&P Global/CIPS UK Composite PMI, which spans services and manufacturing firms, rose to 52.5 in January, the highest in seven months and up from December's final reading of 52.1.
Economists polled by Reuters had forecast a slightly smaller increase to 52.2.
The BoE is due to announce its latest decision on interest rates and its outlook for the economy on Feb. 1. Many investors and analysts expect the central bank to soften its stance against talking about cutting rates from their nearly 16-year high.
But investors took Wednesday's PMI as a sign that the BoE would be in no hurry to lower borrowing costs. Rate futures still showed investors largely expecting four quarter-point rate cuts in 2024 but with less conviction than earlier in the day.
ING economist James Smith said the recovery in Britain's services sector contrasted with weakness in the euro zone, where the composite PMI of 47.9 remained in negative territory in January and was fractionally below analysts' forecasts.
"The issue for the Bank of England is that inflation is also proving sticky, and the PMI highlights the disruption in the Red Sea," Smith said. "Today's data adds to the case for the Bank of England to wait a little longer before cutting rates. We expect a cut in August."
A CASE FOR CAUTION
Separate data published earlier on Wednesday also suggested the BoE might move cautiously.
Pay awards from British employers held at their highest sustained level in over 30 years in the last three months of 2023 although deals struck in early 2024 suggest pay growth has peaked, human resources information provider XpertHR said.
The PMI's headline measure of activity among services firms, climbed to 53.8, an eight-month high and up from December's 53.4.
By contrast, manufacturing continued to shrink although the pace of contraction slowed a bit to 47.3 from 46.2, its closest to the no change level of 50.0 since last April.
Factories reported the first growth in input costs since April as the re-routing of ships away from the Red Sea pushed up freight costs and delivery times rose for the first time in a year. But an increase in prices charged by manufacturers was only modest.
The pace of cost increases for services firms - chiefly wages - grew by the least in three months.
Prices charged by firms overall increased at their weakest pace since October 2023.
There were other positive signs in the "flash" January PMI including the first growth in employment in five months, the strongest increase in new work since last May and the most optimism about the outlook also since last May.
Reporting by William Schomberg; Editing by Christina Fincher
Source: Reuters