Britain's economy ended 2023 in stronger condition than expected based on business studies. At the same time there are other signs that the Bank of England's (BoE) high yield campaign may not trigger an economic downturn.
Prime Minister Rishi Sunak is hoping for better economic news before elections expected to be held this year. Data on Thursday showed businesses and households were able to survive amidst high inflation and borrowing costs which were at their highest level in 15 years.
The S&P Global UK Service Purchases Index ended December rising to 53.4, indicating that the sector developed more strongly in December compared to an initial reading of 52.7 and 50.9 in November. Outlook for future activity rose to the highest level since May.
"Further increases in the December PMI suggest a downturn is seen as inevitable, although unlikely," said Gabriella Dickens, UK economist at Pantheon Macroeconomics. “However, this study adds support to our view that activity should increase gradually throughout 2024.”
Data from the Bank of England also released on Thursday showed net financing by British users was the highest in almost seven years in November with retail sales soaring and lenders granting the most home mortgages since June.
The value of the Sterling currency strengthened compared to the US dollar and euro after PMI data and other Bank of England data were published. Investors continue to expect the first BoE benefit rate cut as early as May.
Tim Moore, economics director at S&P Global Market Intelligence, said PMI data showed the services sector ended 2023 well, helped by expectations of a BoE benefit rate cut and a stronger world economy. “However, many firms still cite challenging business conditions caused by the stagnation of the UK economy and strong pressure on margins rather than rising labor costs,” Moore said.
The BoE is facing pressure from the business sector, which is concerned about the economy, that it will reduce benefit levels. Investors are assessing the first reduction in Bank Rates as early as May.
