UK economy bounces back after Covid as service sector grows at fastest rate in months

Experts said the result gives the Bank of England room to raise interest rates again later this month as it looks to cool rocketing inflation

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Growth in Britain’s all-important services sector rose at its fastest pace for eight months in February despite more record price rises.

The closely watched IHS Markit/CIPS services PMI survey scored 60.5 in February, up from 54.1 in January and the highest score since last June as the sector rebounded thanks to the Omicron wave easing and all restrictions being lifted.

Any score above 50 shows growth in the sector.

The report revealed firms across the sector increasingly passed on higher costs to consumers, with output price inflation hitting a new record for the second month running.

Around one third of survey respondents raised their selling prices during February in response to rampant inflation, according to the report.

Service firms saw input price inflation jump at the second fastest pace since records began over 25 years ago, with rising staff salaries, fuel and energy bills among the biggest cost challenges.

The overall all-sector PMI reading rose from 54.2 in January to 59.9 in February, which was down slightly on last month’s flash PMI score, but economists said this was likely due to the February storms.

Experts said the result points to solid economic growth in the first quarter, giving the Bank of England room to raise interest rates again later this month as it looks to cool rocketing inflation.

Andrew Harker, economics director at IHS Markit, which compiles the survey, said: “The UK economy looks to have been expanding sharply midway through the first quarter of the year.

“Inflationary pressures remained acute, however, with selling prices rising at a fresh record pace for the second month running.

“This pass-through of costs to customers will very likely prompt the Bank of England to hike interest rates again at the next MPC (Monetary Policy Committee) meeting in March.”

But there are fears growth may come under pressure in the second quarter and beyond as the cost-of-living crisis and conflict in Ukraine weigh on confidence.

Gabriella Dickens, senior UK economist at Pantheon Macroeconomics, said: “The recent surge in oil, natural gas and agricultural commodity prices, in response to Russia’s invasion of Ukraine, will squeeze over the next year the amount of income that households have left to spend on domestically produced goods and services.

“So after brisk quarter-on-quarter growth in GDP (gross domestic product) of about 0.6% in the first quarter, we expect the economy to stagnate in the second quarter and to grow only slowly in the second half of this year.”