Economists expect expansion to continue in the UK manufacturing and services sectors

Jasper Jolly
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The services sector is expected to show a further expansion in February (Source: Getty)

Closely watched surveys of economic activity are expected to show the UK economy continued to expand in February, despite rising input prices.

The manufacturing purchasing managers’ index (PMI), reported on Wednesday, is predicted to show a continued expansion in the sector.

The crucial measure of activity for UK manufacturers eased slightly from its fastest pace of expansion since mid-2014 to reach 55.9 in January, but it is still expected to show a performance well above the 50 mark indicating an expansion in the sector, at around 56 points.

Read more: A year of two halves: UK GDP revised up at end of year, but down at start

Meanwhile the services purchasing managers’ index, which is reported on Friday, is also expected to show a further easing, although still firmly in expansionary territory after a reading of 54.5 in January.

Kallum Pickering, senior UK economist at Berenberg, said: “PMI data for February is likely to signal strong growth in the services and manufacturing sectors, driven by solid domestic demand and the cyclical upturn in global demand.”

However, the construction sector, which sees activity reported on Thursday, “is likely to have expanded at a more meagre pace as Brexit uncertainty is dampening demand for long-lived investments and as firms struggle with labour shortages,” says Pickering.

Inflationary pressure, after sterling’s post-EU referendum devaluation, is expected by most forecasters to drag on demand. However, it may also deliver a welcome boost to manufacturing and services exporters.

Read more: Trumping Brexit: UK manufacturing confidence hits 20-month high

Simon French, chief economist at Panmure Gordon, said: “The data in January was softer than during the fourth quarter, suggesting businesses and households were starting to take stock of inflationary pressures coming through.”

“However, prospects for growth remain good for the remainder of 2017, with a weaker pound supporting domestic demand and forward employment intentions robust to policy headwinds,” he said.

Paul Hollingsworth, an economist at Capital Economics, expects the surveys to show a “decent amount of momentum” for the UK economy, with growth “better balanced” as manufacturing output increases.

Read more: Car manufacturing has hit its highest level in 17 years

However, economists are split as to whether the pace of expansion will increase or slow slightly.

Emily Nicol and Mantas Vanagas of Daiwa Capital Markets expect a further dip in the manufacturing PMI, but Howard Archer, chief UK and Europe economist at PMI survey compilers IHS Markit, expects domestic demand to continue to sustain the sector.

The strength of new orders bodes well for the February figures, says Archer. “New orders were elevated in January as they only slowed slightly from a 30-month high in December. Domestic demand was robust in January although export orders disappointingly grew only slightly despite the weak pound.”

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