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UK business activity grows but factories hit by Red Sea crisis

UK businesses growth increased to a seven-month high in January but factories were hit by the Red Sea crisis (David Davies/PA)
UK businesses growth increased to a seven-month high in January but factories were hit by the Red Sea crisis (David Davies/PA)

UK businesses’ growth increased to a seven-month high in January as a stronger service sector helped counteract supply disruption in the Red Sea sparking further turmoil amongst manufacturers.

The influential S&P Global/CIPS flash UK purchasing managers’ index (PMI) reported a reading of 52.5 in January, up from 52.1 in December.

Any reading above the 50-score threshold indicates the sector is growing. The flash figures are based on preliminary data.

Service sector businesses, which include everything from pubs and restaurants to financial firms, transport, cinemas and theatres, have been benefiting from an increase in spending and activity.

Firms said they have seen stronger demand among their customers, with some owing that to lower borrowing costs.

The “flash” survey gathers the responses of about 1,300 service providers and manufacturers ahead of final monthly data published early in February.

The stronger performance among services firms was somewhat counteracted by manufacturers who are in the thick of an ongoing slump in activity.

Production across the sector fell for the 11th month in a row in January, according to the preliminary PMI data.

Factory supply chains were impacted by longer wait times for container freight in the wake of the Red Sea crisis, the survey found.

Since late November, Iran-backed Houthi rebels in Yemen have attacked container ships going through the trade route, which is crucial for transporting energy, commodities and consumer goods.

It has resulted in some firms rerouting their vessels because of safety concerns, leading to lengthier shipping times, or suspending shipments entirely.

Red Sea shipping attacks
The Red Sea shipping attacks have lengthened delivery times and helped push up costs for manufacturers, PMI data showed (LPhot Chris Sellars/MoD/Crown Copyright/PA)

The latest PMI data pointed to the steepest lengthening of vendor wait times since September 2022, with delays overwhelmingly linked to longer international shipping times which has had a knock-on effect on manufacturers.

It has also pushed up costs for businesses across the sector, at the fastest rate since March, according to the survey.

Chris Williamson, chief business economist at S&P Global Market Intelligence, said: “UK business activity growth accelerated for a third straight month in January, according to early PMI survey data, marking a promising start to the year.

“However, the surprising strength of growth in January, which has exceeded forecasts, may deter the Bank of England from cutting interest rates as soon as many are expecting, especially as supply disruptions in the Red Sea are reigniting inflation in the manufacturing sector.

“Supply delays have spiked higher as shipping is re-routed around the Cape of Good Hope, the longer journey times lifting factory costs at a time of still-elevated price pressures in the service sector.”

He added that inflation is likely to remain “stubbornly higher”, at between 3% and 4%, in the near future.

It follows a surprise increase in the rate of consumer prices index (CPI) inflation to 4% in December, from 3.9% in November, according to the latest official figures.

Bank of England report
The Bank of England will set UK interest rates next week (PA)

Bank of England policymakers will set UK interest rates next week, and experts have suggested they will be influenced by signs of more persistent inflation pressures – lowering the possibility that they will able to cut rates anytime soon.

James Smith, developed markets economist for ING, said the latest data “serves as a reminder that the Bank of England won’t be rushed into rate cuts this year”.

“Its new forecasts next week will reflect an inflation backdrop that is much improved since the last projections in November,” he said.

“But the committee will want to see more progress on services inflation and wage growth before acting, while a large tax cut package in March would probably be another reason to hold rates higher for a little longer.”