UK services sector picks up in January, Red Sea crisis dents manufacturing

Activity in the UK services sector picked up in January, but the Red Sea crisis hit manufacturing supply chains, according to a survey released on Wednesday.

The S&P Global flash composite purchasing managers’ index - which measures activity in both sectors - rose to 52.5 in January from 52.1 the month before, hitting a seven-month high. Economists were expecting a reading of 52.2.

A reading above 50 signals expansion, while a reading below indicates contraction.

The flash services PMI business activity index printed at 53.8, up from 53.4 and an eight-month high.

The index for manufacturing ticked up to 47.3 in January from 46.2 a month earlier, but remained firmly in contraction territory. There were widespread reports of higher freight costs in the wake of the Red Sea crisis, while global shipping delays meant suppliers’ delivery times lengthened for the first time in 12 months.

Chris Williamson, chief business economist at S&P Global Market Intelligence, said: "UK business activity growth accelerated for a third straight month in January, according to early PMI survey data, marking a promising start to the year. The survey data point to the economy growing at a quarterly rate of 0.2% after a flat fourth quarter, therefore skirting recession and showing signs of renewed momentum.

"Businesses have also become more optimistic about the year ahead, with confidence rebounding to its highest since last May. Business activity and confidence are being in part driven by hopes of faster economic growth in 2024, in turn linked to the prospect of falling inflation and commensurately lower interest rates."

Williamson said the surprising strength of growth in January may deter the Bank of England from cutting interest rates as soon as many are expecting, especially as supply disruptions in the Red Sea are reigniting inflation in the manufacturing sector.

"Supply delays have spiked higher as shipping is re-routed around the Cape of Good Hope, the longer journey times lifting factory costs at a time of still-elevated price pressures in the service sector," he said. "Inflation is therefore indicated to remain stubbornly higher in the 3-4% range in the near future."

Ashley Webb, UK economist at Capital Economics, said: "These data will add to the Bank of England’s unease about inflation persistence. As a result, the Bank will probably continue to push back against the prospect of near-term interest rate cuts next week."