UK businesses receive post-election boost as activity expands for first time in five months

Businesses in the UK have enjoyed a post-election boost in the New Year according to a snapshot survey of activity that could kill off the prospect of a cut in interest rates next week.

Business activity expanded in January for the first time in five months and the fastest rate for more than a year, driven by the sharpest increase in new work since September 2018, the purchasing managers index (PMI) by IHS Markit showed.

Its index, which is based on approximately 85 per cent of usual monthly replies — rose to 52.4 in January, from 49.3 in December. It was the first time it had registered above the 50.0 points that marks the line between expansion and contraction the first time since August 2019.

“It seems likely that the rise kills off the prospect of an imminent rate cut by the Bank of England, with policymakers taking a wait-and-see approach as they assess the performance of the economy in the post-Brexit environment,” IHS Markit chief business economist Chris Williamson said.

The survey, which is based on reports from managers in offices and factories, was the highest for 16 months and signalled a moderate expansion of business activity across the UK private sector economy.

HIS said there were “widespread reports” that reduced political uncertainty following the general election had had a positive impact on business and consumer spending decisions at the start of the year.

The rebound was led by the services sector that makes up 80 per cent of the economy. Its reading of 52.9, up from 50.0 in December, was also at a 16-month high, while the rebound in manufacturing to an eight-month high of 49.5 was not enough to tip over the line into expansion.

Kallum Pickering, senior economist at Berenberg bank, said that the jump in the PMIs for January provides yet more evidence that UK economic activity has started to turn up sharply since the big election victory.

“Brexit progress, the promise of a big fiscal stimulus in Spring and the end of the risk that far-left Labour leader Jeremy Corbyn could one day become Prime Minister have lifted confidence and lowered uncertainty,” he said.

Market traders have pared back their bets for a rate cut from 70 per cent on Friday to less than 50 per cent after the OMI data.

Simon Wells, chief European economist, at HSBC said that, on balance, he believed the PMI survey would keep the Bank of England on hold at the last meeting of its monetary policy committee to be chaired by outgoing governor Mark Carney.

But he added: “Before the market races to price out any chance of rate cuts this year, it is worth keeping in mind that GDP and retail sales data were very weak, and inflation has been soft.

“The PMI is still consistent with a 0.2% quarterly GDP growth rate, in line with the BoE’s November forecast and still fairly sluggish. We therefore still think a rate cut could happen in May, although January now looks less likely.”