Consumer spending over the holidays has helped put the British economy on track to avoid predictions of a contraction in the first three months of the year, paving the way for the Bank of England to raise interest rates next month.
The latest monthly snapshot from S&P Global and the Chartered Institute of Procurement and Supply (Cips) showed the fastest rebound in private sector output in a year, driven by increased spending on travel, leisure and entertainment.
Chris Williamson, chief business economist at S&P Global Market Intelligence, said the report indicates the economy grew 0.4% in the first quarter.
That would be a much stronger performance than forecast by the Bank of England, which has predicted the UK economy will contract 0.1% between January and March as households and businesses come under increasing pressure. by the highest levels of inflation in four decades. The figure will be released by the National Statistics Office next month.
A 12th straight interest rate hike at the Bank’s next meeting on May 11 was “an increasingly close deal,” Williamson added. “The key takeaway is that the economy as a whole is not only showing encouraging resilience, but has gained growth momentum heading into the second quarter.”
The monthly survey of 1,300 manufacturing and service sector companies, which is closely followed by the Bank and Treasury, showed pockets of resilience in the economy despite the cost-of-living crisis.
The flash composite Purchasing Managers’ Index, compiled from business survey responses on current economic conditions, rose from 52.2 in March to 53.9 in April, the highest level in 12 months. A reading of 50.0 separates private sector growth from contraction.
The figures come after the easyJet boss suggested earlier this week that British consumers were shrugging off cost-of-living crisis concerns to focus their spending on experiences.
“Even though there is a reduction in people’s income, people are prioritizing vacations and traveling even more than before,” said Johan Lundgren. “This is due to the fact that people are refocusing on experiences and doing things instead of investing in their homes, maybe.”
According to the latest PMI reading, strong service sector activity levels were offset by a sharp drop in manufacturing output, with factory orders for white goods coming under pressure amid weaker consumer demand.
John Glen, chief economist at Cips, said there were stark differences in the fortunes of the two sectors, adding: “Consumers chose vacations over appliances.”
Manufacturers blamed the drop in new work on customers depleting stocks, rising energy costs and subdued consumer demand for large purchases. Businesses filled up their inventories amid disruption to the global supply chain during the Covid pandemic, at a time when consumers rushed to buy goods when travel and hospitality were shut down or severely disrupted.
The monthly survey showed that the pressure on supply chains eased further in April, as delivery times fell for the third consecutive month due to improved availability of raw materials and lower demand. However, companies noted difficulties in obtaining electrical items amid supply restrictions in Asia.
Rhys Herbert, a senior economist at Lloyds Bank, said consumers had not yet fully felt the impact of higher interest rates.
“Private sector services continue to perform well, helped by better-than-expected consumer spending. However, consumers have yet to feel the full impact of the interest rate hike.
“Few expect a strong rebound in manufacturing given the relative weakness of the sector globally, and the sterling’s rally could pose some competitiveness issues if it accelerates.”