British businesses saw their fastest activity growth in nearly a year this month, according to preliminary purchasing managers’ data. The figures suggest a stronger rebound from last year’s mild recession than economists had anticipated. However, rising business costs, driven by increasing wages and higher transport and raw material prices, could prompt the Bank of England to be more cautious about cutting interest rates.
The S&P Global UK Composite Purchasing Managers’ Index (PMI) for the services and manufacturing sectors reached an 11-month high of 54.0 in April, up from 52.8 in March, surpassing all forecasts from a Reuters poll of economists. The growth was led by a significant rise in the services index, which jumped to 54.9 from 53.1. In contrast, the index for the smaller manufacturing sector unexpectedly dropped to 48.7 from 50.3, moving into contractionary territory as it fell below 50.
Chris Williamson, chief business economist at S&P Global Market Intelligence, noted that the data indicated the economy grew at a quarterly pace of 0.4% in April, up from an estimated 0.3% in the first quarter. “Early PMI survey data for April show that the UK economy’s recovery from last year’s recession continues to gain momentum,” Williamson said.
Last month, the Bank of England estimated that the economy grew by just 0.1% in the first quarter, with only slightly better growth expected for the second quarter.
Stronger growth raises the likelihood that businesses will increase prices in response to rising costs, presenting a challenge for the Bank of England as it aims to bring inflation back to its 2% target. While a reduction in regulated energy tariffs could lower inflation below 2% in the current quarter, the BoE predicted last month that it could rise back toward 3% later in the year. However, BoE Deputy Governor Dave Ramsden stated on Friday that there were signs inflation might remain close to 2%.
Financial markets expect the Bank of England to cut interest rates by at least half a percentage point this year, with the first reduction anticipated in June or August.