Britain's economy has shown signs of modest improvement following finance minister Rachel Reeves' annual budget statement in November, after a prolonged spell of uncertainty that affected both employers and households. Recent survey results and official data released last week point to a rebound in business activity and a lift in consumer sentiment, even as labour market weakness and relatively high inflation persist.
Business activity stages a rebound
Purchasing managers' surveys indicate businesses enjoyed their strongest month in January since before Keir Starmer took office in July 2024. Services firms in particular led the upturn, while manufacturers reported a marked expansion in order books - the strongest pace seen in almost four years. Despite the jump, analysts cautioned that the improvement may not be durable. The S&P Global Purchasing Managers' Index, though higher in January, remains below its pre-COVID average under the current government.
Consumers slightly more upbeat
Consumer confidence also shows signs of easing from the depths of last year. GfK's consumer confidence index moved up to its highest level since August 2024. This contrasts with the shorter S&P Global survey for January, which recorded a dip in sentiment to a nine-month low. Official retail data showed retail sales volumes rose in December at the fastest annual pace since April, reversing weak readings in October and November. Other spending metrics have been softer and some large retailers reported disappointing end-of-year sales, indicating that the consumption picture remains mixed.
Output and growth surprises
Output data showed GDP expanded by 0.3% in November, a stronger-than-expected monthly rise and the most sizeable increase since June. That growth was aided by a return to full production at Jaguar Land Rover after a cyberattack and by better-than-anticipated services sector activity, both of which contributed to the November surprise.
Inflation trends and central bank expectations
Inflation ticked up to 3.4% in December, above forecasts, but forecasters and some policymakers expect it to slow markedly in the near term. Bank of England Governor Andrew Bailey has said inflation is likely to be close to the central bank's 2% target by April or May. Other members of the Bank of England have been more cautious. Megan Greene said she remained concerned about lingering wage-driven inflation pressures.
Labour market remains a drag
The labour market stayed subdued, with the number of payrolled workers falling in December by the largest amount since November 2020, although some large preliminary falls in that earlier period were later revised up. The January PMI survey signalled that firms remained reluctant to hire, with employment in the services sector declining at a faster pace in January than in December.
Takeaway
Recent data point to a cautious recovery in business activity and consumer sentiment after the November budget statement, but persistent labour market softness and comparatively high inflation relative to other Group of Seven economies leave the overall picture uncertain.