- February's flash composite PMI was unexpectedly strong, rising above the 50 'no-change' mark for the first time since July 2022. But while the risk of a serious downturn is receding, the EY ITEM Club thinks there is a still a reasonable chance the economy will contract over the first half of this year.
- Persistent inflation, the freeze in tax thresholds, and the impact of rising interest rates are dragging on disposable incomes, while industrial action is continuing to weigh on activity. But support to household spending power from declines in energy prices and inflation should aid a recovery later this year.
Martin Beck, chief economic advisor to the EY ITEM Club, says: “A flash composite PMI of 53.0 in February confounded expectations of another month in contractionary, sub-50, territory, signalling the first rise in private sector activity since July 2022 and the strongest gain in eight months. Both the flash services and manufacturing indices delivered healthy rises, with the services PMI increasing to 53.3 from 48.7 and the index of manufacturing output climbing to 51.6 from 47.0.
“A much better performance from the PMIs is consistent with recent signs from the labour market and the retail sector that the economy is demonstrating a useful degree of resilience. Given the role that sentiment can play in influencing the PMI's, the prospect of a boost from the sustained fall in energy futures prices may have helped February's numbers – the survey's measure of business optimism rose to the highest level since last March.
“However, the EY ITEM Club thinks it’s still uncertain whether the economy will fall into recession. December's fall in GDP provides a weak launchpad for growth and there has been further widespread industrial action over the last few weeks, suggesting that strikes will continue to weigh on activity in Q1. Meanwhile, Q2’s extra bank holiday will probably drag on activity in that quarter. Moreover, households' disposable income is being squeezed by high inflation, tax rises, and an increase in interest rates.
“But looking ahead, the EY ITEM Club think that a continued fall in wholesale energy prices and a decline in general inflation should reduce the squeeze on household spending power. On that front, February's survey showed input cost inflation easing to the slowest since April 2021, although a slowdown in growth in prices charged was more modest. As a result, the EY ITEM Club thinks the economy should return to growth from the second half of this year.”