But although February's PMIs suggest the economy is showing resilience, activity continues to face some serious headwinds, including high inflation, rising interest rates and tighter fiscal policy. As a result, the ITEM Club thinks the economy will struggle to grow over the next few quarters, although recession risks are receding.
Martin Beck, chief economic advisor to the EY ITEM Club, says: “February's services PMI rose to an eight-month high of 53.5 from 48.7 in January. Combining the services reading with February's manufacturing index, which also picked up on the previous month, the composite PMI increased to 53.1 from January's 48.5. This was the first reading above the 50 'no-change' mark since July 2022, signalling an expansion in activity.
“Respondents to the S&P Global/CIPS survey reported higher demand on the back of a rebound in business investment, rising export sales and improved client optimism over easing inflation. But although February's PMIs suggest the economy is showing some resilience, the near-term growth outlook still faces several headwinds — including persistently high inflation, rising interest rates and tax increases. In addition, ongoing industrial action will strain activity in some sectors, while Q2 will have an extra bank holiday. As a result, the EY ITEM Club thinks the economy will struggle to grow over the first half of this year, although recession risks are receding.
“February's survey also pointed to a further easing in inflationary pressures. The pace of input costs rises was the slowest since June 2021 as supply-chain conditions improved, while output price inflation cooled again although the slowdown here was more modest. These findings, combined with falls in the official inflation measure and further declines in energy prices, reinforce the EY ITEM Club’s view that inflation peaked towards the end of 2022 and should quickly fall this year.”