UK economy shrinks but business optimism soars ahead of Budget

Tom Belger
·Finance and policy reporter
·2-min read
BARNSLEY-ENGLAND - FEBRUARY 27: A lady walks past a closed shop which is To Let on February 27, 2021 in Barnsley, England . (Photo by Nathan Stirk/Getty Images) (Photo by Nathan Stirk/Getty Images)
A closed UK shop as IHS Markit's services PMI data is published for the UK. Photo: Nathan Stirk/Getty Images

Large swathes of the UK economy have contracted more than expected over the past month, new industry data shows ahead of the 2021 Budget.

A slim majority of companies in Britain's dominant services sector—from cafes to consultancies—saw output shrink last month, according to IHS Markit's purchasing managers' index (PMI) data.

The figures came in below analysts' forecasts but still mark a significant improvement on the previous month. More companies expanded trade despite lockdown restrictions, and optimism hit a 14-year high amid the vaccine rollout.

The results come ahead of the UK chancellor's 2021 Budget later on Wednesday, in which Rishi Sunak will set out tax and spending plans and official economic forecasts.

WATCH: Chancellor Rishi Sunak extends UK furlough scheme

The new UK services PMI data, compiled by IHS Markit and the Chartered Institute of Procurement & Supply) saw a headline reading of 49.5 in February, a sizeable improvement on the 39.5 seen a month earlier as another lockdown began.

Survey responses are turned into figures on a scale from 0 to 100, with readings above 50 showing most firms expanding and below 50 showing most firms in decline. The 49.5 reading suggests a downturn has bottomed out, with most services' firms trade little-changed on last month but still subdued amid restrictions.

IHS Markit said companies were struggling with not only curbs on travel, leisure and hospitality, but also the biggest growth in costs in a year. Respondents highlighted high fuel bills, shipping costs, and Brexit supply chain issues.

But the latest PMI report noted there were "pockets of growth" in technology and business services, the furlough scheme had helped stabilise employment and vaccine progress boosted optimism.

"Vaccine programmes and the promised uplift in marketplace restrictions offered hope to ailing firms looking forward to a summer of roaring trade as optimism climbed to its highest since December 2006," said Duncan Brock, group director at the CIPS.

READ MORE: UK manufacturing activity rises faster than expected

A separate PMI survey for Britain's manufacturing sector showed expansion over the past month, with the pace of growth picking up. The headline reading in the figures published on Monday came in at 55.1, up from 54.1.

Companies warned Brexit and COVID-19 disruption had hit their supply chains however, putting pressure on prices and constraining output.

A composite index for services and manufacturing came in at 49.6 in February, indicating a narrow majority of private sector companies continue to suffer falling trade.

READ MORE: UK employers have handed back £700m in furlough grants as scheme extended

WATCH: How to prevent getting into debt