UK off to strong start in 2024 despite recession while Germany and France stagnate
The UK economy has made a stronger start to 2024 than major European economies, survey data suggests, as falling inflation and hopes of interest rate cuts fuels hopes of a recovery.
Despite falling into a shallow recession in the second half of last year, business activity in the UK seems to have bounced back at the beginning of 2024.
S&P’s closely watched purchasing managers’ index (PMI), which measures private sector activity, has exceeded expectations for two months in a row. In February, it climbed to a nine-month high of 53.3. The 50-mark separates growth from contraction.
“Official data may have shown the economy slipping into technical recession last year, but today’s PMIs suggest modest growth will return in Q1,” Simon Wells, chief European economist at HSBC said.
February’s PMI follows much stronger than expected retail sales for January. Sales volumes climbed 3.4 per cent, wiping out the steep fall in December.
More negatively for the UK economy, the survey showed that cost pressures increased at their fastest pace in six months. Higher wage bills drove costs higher for service firms while disruption in the Red Sea remained a concern for manufacturing firms.
“The latest survey evidence could reinforce policymakers’ concerns about stickiness in core inflation and pay growth, thus potentially pushing back the timing of the first rate cut a little.,” Martin Beck, chief economic adviser to the EY Item Club said.
Although business activity improved in the eurozone too, with the PMI increasing from 47.9 to 48.9, this masked weak performances from the bloc’s largest economies.
A deepening downturn in Germany’s manufacturing sector saw business activity contract at its fastest rate since October, dropping to 46.1.
It has now been in contraction for eight straight months. “Germany is in trouble,” Melanie Debono, senior Europe economist at Pantheon Macroeconomics, said.
This follows a poor 2023, in which the German economy shrank 0.3 per cent as it struggled with inflationary pressures, high borrowing costs and weak demand for its exports.
Activity in France remained in contraction, although the downturn eased. According to HCOB, PMI rose to 48.9, up from 47.9 in January.
France was in “recovery mode,” Norman Liebke, economist at Hamburg Commercial Bank, said. “Even if the economy continues to shrink, this is happening at a much slower pace”.
The French economy avoided a recession in the second half of last year, managing to grow 0.9 per cent across 2023 as a whole.