UK service sector returns to growth in February

The UK’s service sector returned to growth in February as business activity expanded at the fastest pace since June 2022, according to a survey released on Friday.

The S&P Global/CIPS services purchasing managers’ index rose to 53.5 from 48.7 in January, coming in above the 50.0 mark that separates contraction from expansion for the first time in six months. The reading was above the initial estimate of 53.3.

The composite PMI, which measures activity in services and manufacturing, ticked up to 53.1 in February from 48.5 the month before. This was above the initial estimate of 53.0.

Tim Moore, economics director at S&P Global Market Intelligence, 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. However, elevated borrowing costs and stretched household finances remained constraints on growth.”

Moore said there was "clear evidence" that input price inflation has peaked, with the latest increase in average cost burdens the weakest since June 2021. Service sector firms commented on lower fuel bills and transport costs, as well as a gradual easing of broader inflationary pressures due to falling wholesale gas prices, he said.

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.

"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.

"It excludes the retail sector, which is at the sharp end of the pull back in households’ real expenditure, the construction sector, which will be among the hardest hit by the sharp increase in borrowing costs, as well as the strike-afflicted public sector. Note too that both the CBI’s monthly Growth Indicator and Lloyds Business Confidence survey still were consistent in February with GDP falling marginally in the first quarter. Accordingly, we continue to think that GDP likely fell by about 0.2% quarter-on-quarter in Q1."