UK Economy Rebounds as Inflation Pressures Persist

British firms have seen significant growth since Keir Starmer became Prime Minister. The S&P Global UK Composite PMI reached its highest since April 2024, reflecting strong private sector activity. Despite this, inflation remains high, leading to reduced expectations for Bank of England interest rate cuts this year.

British firms are experiencing the fastest growth since Prime Minister Keir Starmer took office, according to a recent survey. This surge, marked by a significant increase in the S&P Global UK Composite Purchasing Managers' Index, prompted investors to scale back expectations of near-term Bank of England interest rate cuts.

Sterling gained strength against the dollar, and UK government bond prices dropped. The PMI reached 53.9 in January, exceeding forecasts and signaling optimism after finance minister Rachel Reeves' budget in November. The rebound is also supported by better-than-expected retail sales and improved consumer morale.

While investors initially expected two interest rate cuts this year, the PMI data has led to a more cautious 50-50 probability. Still, inflation remains high and the labor market shows signs of cooling. The services sector spearheads the economic upswing, although challenges like elevated staffing costs continue to drive higher selling prices.

(With inputs from agencies.)