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A resilient rate of economic growth in the UK during January
masks wide variations across different sectors. Consumer-facing
businesses have been hit hard by Omicron and manufactures have
reported a further worrying weakening of order book growth, but
other business sectors have remained encouragingly robust.
Looking ahead, while the Omicron wave meant the hospitality
sector has sunk into a third steep downturn, these restrictions are
now easing, meaning this downturn should be brief. Many business
and financial services companies have meanwhile been far less
affected by Omicron, and saw business growth accelerate at the
start of the year.
Business confidence in the outlook also picked up, driving
sustained solid jobs growth. With inflationary pressures remaining
elevated at near-record levels, this all adds to the likelihood of
the Bank of England hiking interest rates again at its upcoming
meeting.
Omicron hits the service sector
UK economic growth slowed slightly in January as a strengthening
expansion of business services activity helped offset a steep
downturn in activity in consumer-facing sectors amid the Omicron
wave.
The IHS Markit/CIPS composite PMI output index, covering both
services and manufacturing, fell from 53.6 in December to 53.4 in
January, according to the early 'flash' reading, indicating the
slowest rate of expansion since the lockdowns in February of last
year.
Dual-speed service sector
Service sector growth slowed - albeit only slightly - in
January, easing for a third month running to hit the weakest since
last February. There were, however, wide divergences within this
vast section of the UK economy.
On one hand, rising COVID-19 cases and heightened restrictions
imposed to contain the Omicron variant caused activity in the
hotels & restaurant sector to fall sharply for a second month
running, dropping at a rate not seen since last February,
accompanied by a further sharp deterioration in transport and
travel services activity.
On the other hand, growth of business-to-business services
accelerated to the fastest since last July, with financial services
activity also picking up strongly during the month, helping to
largely offset the weakness in hospitality-oriented sectors.
Factories buoyed by easing supply
constraints
Manufacturing output growth meanwhile ticked up to the fastest
since August as alleviating supply constraints allowed factories to
stem the recent rapid growth of backlogs of uncompleted orders.
Suppliers' delivery times lengthened to the least extent since
November 2020.
A further effect of the easing supply crunch was that fewer
supplier price hikes were reported, helping reduce the overall rate
of manufacturing input price inflation to the slowest since last
April.
Slower goods price growth offset by surging service sector
charges
Although manufacturing input cost inflation slowed, feeding
through to a marked cooling of factory gate selling price
inflation, service sector costs rose at an increased rate, fueled
in particular by higher energy prices and wage growth. Charges
levied for services consequently rose at the second-steepest rate
on record as firms passed higher costs on to customers.
Measured across both manufacturing and services, input cost and
selling price inflation re-accelerated in January as a result,
pointing to sustained elevated consumer price inflation in coming
months.
Resurgent demand
While the Omicron wave meant the hospitality sector has sunk
into a third steep downturn in December and January, case numbers
appear to have peaked and these restrictions are being lifted,
meaning this downturn should be brief. In fact the survey is
already seeing some signs of resurgent demand for many
travel-related services. Many business-facing and financial
services companies have meanwhile been far less affected by Omicron
than in prior COVID-19 waves, and saw business growth accelerate at
the start of the year in response to signs that the Omicron wave
appears less disruptive than feared, albeit with activity being
constrained in many cases by staff absenteeism due to illness and
self-isolation, as well as difficulties finding suitable recruits
to fill vacancies. Note that demand - as measured by new business -
rose across the UK services economy to a greater extent than output
to a degree not seen for a year, reflecting these labour market and
ongoing supply chain constraints.
Diverging outlooks
Service sector prospects consequently improved in January, with
new orders growth lifting from December's ten-month low and
expectations for the year ahead perking up to the brightest since
August
The outlook is less bright in manufacturing, however. While
output growth was boosted by fewer supply constraints, growth of
new orders slowed sharply to the weakest since January of last
year, registering the second-worst performance since June 2020. New
export orders for goods barely rose after four months of continual
decline, with around one-in-three firms linking lost export
business at least in part to Brexit. In manufacturing, output
growth exceeded that of new orders in January, hinting at excess
capacity developing. At the same time, manufacturers' expectations
of output growth in the coming year sank to a one-year low.
Chris Williamson, Chief Business Economist, IHS
Markit
Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.
