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Recession fears fade as UK services sector grows for the first time in months

Business A worker cuts newly manufactured bars of steel at the United Cast Bar Group's foundry in Chesterfield, Britain, April 12, 2022. Picture taken April 12, 2022. REUTERS/Phil Noble     TPX IMAGES OF THE DAY
Business: Average prices charged by service providers continued to rise sharply in February. Photo: Phil Noble/Reuters (Phil Noble / reuters)

The UK’s service sector returned to growth in February as business activity expanded at fastest pace since June 2022.

Services firms reported that business activity and incoming new work both rose last month, for the first time since August 2022, as fears of an imminent recession fade.

The S&P Global/CIPS UK services PMI survey showed a reading of 53.5 in February, up from 48.7 in January and slightly ahead of market expectations.

Any score above 50 is considered growth while a reading below indicates the economy is shrinking.

Businesses were helped by the decline in wholesale gas prices, which left input inflation at its lowest level in 20 months.

Rising export sales contributed to the rebound in total new orders in February, reaching its strongest level since May 2022. Service sector companies often noted stronger demand from clients in the US and western Europe.

Read more: My first boss: Antony Jenkins, former Barclays CEO on the digitisation of banking

Average prices charged by service providers continued to rise sharply in February, and the rate of inflation slowed to a much lesser extent than seen for input costs.

Tim Moore, economics director at S&P Global Market Intelligence, which compiles the survey, said: “UK service providers moved back into expansion mode in February as fading recession fears and improving business confidence resulted in the strongest rise in new orders since May 2022.

Read more: Fuel prices fall for fourth month in a row but diesel still 'seriously overpriced'

“However, elevated borrowing costs and stretched household finances remained constraints on growth.

“Service providers appear confident that demand remains sufficiently resilient to pass on higher costs to clients.

“The latest survey indicated that business activity expectations rebounded to highest since March 2022, helped by reduced political uncertainty, an improving global economic outlook, and hopes that peak interest rates are on the horizon.”

However, Samuel Tombs, chief UK economist at Pantheon Macroeconomics said "it’s too soon to conclude that a recession has been avoided, despite the rise in the composite PMI above 50 for the first time since July."

Read more: Bank of England's assessment of UK economy hints at rising interest rates and prices

He calculates that the average level of the composite PMI in Q1 so far, 50.8, is consistent with a mere 0.1% quarter-on-quarter increase in GDP in Q1.

"What's more, a simple regression against quarter-on-quarter GDP growth between 1998 and 2019 shows that the PMI's prediction has been wide of the mark on average by 0.3 percentage points. This error margin partly stems from the fact that the composite PMI covers sectors of the economy accounting for just 51% of GDP," he added.

Tom Hopkins, portfolio manager at BRI Wealth Management, said: “UK Services PMI increased to 53.5 points in February from 48.70 points in January, beating consensus expectations of 53.3. This figure is the highest in eight months and above the 50 point threshold for growth for the first time since September. Today’s data from February's survey pointed to an easing in inflationary pressures.

"It also points to stronger levels of optimism regarding growth prospects thanks partly to the abating of political uncertainty. We would proceed with caution from here. Core Inflation is proving stubborn and consumer spending continues to be squeezed due to cost of living difficulties and higher borrowing costs. We think it’ll be a tough year for UK households.”

Watch: What is a recession and how do we spot one?

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