UK services economy stands strong amid Omicron Plan B assault

Britain’s services economy has stood strong in the face of the re-emergence of curbs on daily life in a bid to clamp down on the Omicron variant, reveals a closely watched survey released today.

IHS Markit’s latest flash purchasing managers’ index (PMI) for the UK services industry came in at 53.3 for January, a marginal dip from December’s 53.6 reading.

Despite dropping to an 11-month low, the services PMI has not tumbled as far as had been feared when the UK government launched plan B measures at the beginning of December.

Guidance to work from home was dropped last week, while remaining curbs will end this week, indicating services firms are ready to reap a windfall from Brits picking up from where they left off before Plan B was imposed.

Adam Hoyes, assistant economist at Capital Economics, said: “The recent fall in Covid-19 cases, relaxation of restrictions and signs of easing supply shortages suggest the economy will recover quickly.”

A reading above 50 indicates a majority of services businesses grew in January despite most of the month being mired in Covid-19 restrictions.

Chris Williamson, chief business economist at IHS Markit, said: “Looking ahead, while the Omicron wave meant the hospitality sector has sunk into a third steep downturn, these restrictions are now easing, meaning this downturn should be brief.”

Nonetheless, the drop in the PMI strengthened economists’ expectations that output contracted in January.

“Omicron has remained a millstone around the economy’s neck,” Pantheon Macroeconomics warned, adding they expect GDP to contract one per cent and 0.2 per cent in December and January respectively. 

British businesses are still embroiled in a fight to stay profitable amid swelling costs triggered by the global supply crunch.

The rate of price increases for inputs used by businesses was the second highest on record since IHS Markit started tracking the data 24 years ago.

Persistent inflation pressures are turning up the dial on the Bank of England to hike rates for the second time in as many months at its next meeting on 3 February.

“Inflation pressures remain intense… the [Bank of England] has little choice but to hike rates again in order to contain price pressures and anchor inflation expectations,” Gabriella Dickens, senior UK economist at Pantheon Macroeconomics, said.

The Bank lifted rates for the first time in over three years last month, hoisting them 15 basis points from a record low 0.1 per cent.

Some economists expect Threadneedle Street to raise rates by as many as four times this year, taking them to 1.25 per cent by the end of 2022.

Figures released by the Office for National Statistics last week revealed UK inflation is running at its highest rate since March 1992, hitting 5.4 per cent.

British factories continued their strong recovery, buoyed by a partial unravelling in supply chain snarl ups 

The overall PMI, which measures output in Britain’s services and manufacturing industries, dipped to 53.4 in January, also an 11-month low and down from 53.6 in December.

The US PMI plunged to an 18-month low of 50.8 this month, IHS Markit said today.