Britain’s economy rebounded in January as fading political uncertainty since Boris Johnson’s election victory helped service sector companies record the strongest upturn in activity since mid-2018.
The services sector – which includes banking, insurance, restaurants and hotels – makes up about 80% of the economy. According to the latest snapshot from IHS Markit and the Chartered Institute of Procurement and Supply, business activity grew for the first time since August.
Powered by a rise in domestic activity as exports remained muted, service firms reported that greater clarity over the political outlook had bolstered consumer spending and business investment across the country.
The IHS Markit/Cips purchasing managers index (PMI) for the sector rose to 53.9 last month, the highest since September 2018. The reading was slightly above initial estimates of 52.9, on a scale where a reading below 50 signals contraction.
Staff hiring increased, while the prospect of faster political decision-making led to an upturn in companies’ willingness to spend, according to the PMI survey.
Tim Moore, an economics associate director at IHS Markit, said the PMI readings indicated that GDP would rise by about 0.2% in the first quarter of the year – a marked turnaround from the end of 2019 when growth, in effect, stalled.
“Signs of greater willingness to spend and renewed positivity about the domestic economic outlook has helped lift service providers’ growth projections to the highest for just under five years,” he said.
Despite the rise in optimism, economists cautioned that the survey of about 650 service sector companies was conducted before the coronavirus outbreak hit business activity in China. Analysts have warned that quarantine efforts in the country could drag down growth in the world’s second largest economy, with spillover effects for other countries.
The PMI also showed that orders for UK service sector companies from the EU remained sluggish as continuing Brexit uncertainty dented demand in January.
Although early snapshots indicate a bounce for the economy since the Conservatives’ unexpectedly decisive election victory, analysts warn that the complexity of Brexit negotiations could increase political uncertainty again towards the end of the year.
Johnson has promised that Britain will come out of the Brexit transition period, which maintains free trade with the EU until the end of December, with or without a comprehensive new trade agreement with Brussels.
Chris Sood-Nicholls, the head of professional services at Lloyds Bank, said: “The mood among firms is currently one of cautious optimism as the pipeline of work put on ice in 2019 begins to flow again. However, many are acutely aware of the reality that we are not out of the woods yet.”
