UK Private Sector Sees Modest Growth in February (02.21.2025)

The UK private sector experienced a slight increase in output in February, as growth in services managed to offset the ongoing decline in manufacturing production.

However, new business continued to contract for the third consecutive month, marking the sharpest drop since August 2023. Employment levels also took a significant hit, with job losses reaching their highest rate since November 2020. Rising wage pressures contributed to the steepest increase in business costs in nearly two years.

PMI Index Reflects Stagnation

The S&P Global Flash UK PMI Composite Output Index stood at 50.5 in February, a slight dip from January’s 50.6 but still above the neutral 50.0 threshold for the sixteenth consecutive month. The service sector saw moderate growth, though the overall pace of expansion remained below the survey’s long-term average. Service providers attributed the slowdown to cautious consumer spending, concerns about the UK’s economic outlook, and global business uncertainty.

Manufacturing Output Continues to Shrink

Manufacturing production contracted for the fourth month in a row, with February showing an even steeper decline. The downturn was driven by weakening domestic and international sales, along with a lack of confidence in short-term demand.

Sharpest Decline in New Business in 18 Months

New business orders continued to fall, with February marking the most severe decline in a year and a half. Export orders dropped significantly, particularly from key markets such as the EU and the US. With demand remaining subdued, businesses faced reduced pressure on capacity, leading to a continued decrease in backlogs of work.

Employment Drops at Fastest Pace in Over Four Years

Employment levels saw a notable decline in February, with job losses accelerating to their highest rate in over four years. Weak demand, excess capacity, and rising payroll costs forced businesses to cut staff. Many companies, particularly in the service sector, chose not to replace departing employees, instead turning to automation to improve productivity.

Rising Cost Pressures Weigh on Businesses

Input cost inflation rose for the fourth consecutive month, driven by higher wages and increased supplier costs in anticipation of upcoming National Insurance contribution hikes. Manufacturing firms also reported higher raw material and energy costs, pushing overall purchasing price inflation to a 25-month high. In response, both manufacturers and service providers raised their prices sharply.

Business Confidence Improves Slightly but Caution Remains

Despite ongoing challenges, business activity expectations for the coming year showed modest improvement. However, firms remain cautious due to macroeconomic uncertainties and geopolitical risks. While there was a slight rise in confidence regarding future business expansion, companies continued to express concerns over demand fluctuations.

Stagflation Risks Pose Challenges for the Bank of England

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, noted that the latest PMI data reflects ongoing stagnation in business activity, with rising job losses and increasing cost pressures. The lack of growth alongside persistent inflation suggests a stagflationary environment, presenting a dilemma for the Bank of England. Although there was marginal output growth in February, the sharp drop in new orders raises concerns about further business activity cuts unless demand recovers. Inflationary pressures, largely driven by rising staffing costs and government policy changes, such as the National Insurance increase and the minimum wage hike, have also intensified job cuts. Many firms specifically attributed their staffing reductions to policy announcements made in the October Budget.

Source: SP Global

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