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

Phil Thornton

Businesses in the UK have enjoyed a post-election boost, according to a snapshot survey that could ward off a cut in interest rates next week.

Activity expanded in January for the first time in five months and at 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.

The 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 since August 2019 that it had registered above 50 points, which marks the line between expansion and contraction.

IHS Markit's chief business economist, Chris Williamson, said: “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."

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

IHS 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, which 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 PMI for January provides yet more evidence that UK economic activity has started to turn up sharply since the election.

“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 pared back their prediction of the likelihood of a rate cut from 70 per cent on Friday to less than 50 per cent after the release of the PMI 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.

However, 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 per cent 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.”