Great article below from AJ Bell –

The UK’s private sector expansion was stronger than anticipated at the start of 2024, preliminary data suggested on Wednesday, though the Red Sea crisis is showing early signs of reigniting inflationary pressures.

The S&P Global flash composite purchasing managers’ index rose to a seven-month high of 52.5 points in January, from 52.1 in December. Rising further about the 50-point no-change mark, it shows the pace of expansion sped up slightly. The reading was higher than FXStreet-cited market consensus of 52.2.

The expansion was solely down to growth within the services sector, as the services flash PMI rose to an eight-month high of 53.8 from 53.4, and came above FXStreet-cited market consensus of 53.2.

Manufacturing remained in sub-50 contraction territory with a flash PMI of 47.3, though the reading was nine-month high, and above 46.2 the prior month. However, production fell at the fastest pace since last October, amid weak order books and overstocked customers.

‘The latest survey also indicated a return of modest private sector employment growth at the start of 2024, supported by improving demand conditions and higher levels of optimism towards the business outlook,’ S&P Global said.

However, private sector firms saw the sharpest rise in input costs since last August, led by cost pressures within UK factories. Firms often remarked on higher freight costs stemming from the Red Sea crisis, while associated shipping delays caused suppliers’ delivery times to extend for the first time in a year. It was also the greatest rise in delivery times since September 2022.

Service providers also noted a steep rise in input costs, stemming from rising wages. However, the rise was the weakest in three months, leading to a softer rise in output pricing. Overall, prices increased at the weakest pace since last October.

‘The survey data point to the economy growing at a quarterly rate of 0.2% after a flat fourth quarter, therefore skirting recession and showing signs of renewed momentum,’ said Chris Williamson, chief business economist at S&P Global Market Intelligence.

‘Businesses have also become more optimistic about the year ahead, with confidence rebounding to its highest since last May. Business activity and confidence are being in part driven by hopes of faster economic growth in 2024, in turn linked to the prospect of falling inflation and commensurately lower interest rates,’ he added.

However, Williamson commented that January’s more-robust-than-expected growth could deter the Bank of England from cutting interest rates as soon as many are expecting. The BoE will also be paying attention to the inflationary pressures stemming from the Red Sea crisis, he added.

‘The longer journey times lifting factory costs at a time of still-elevated price pressures in the service sector. Inflation is therefore indicated to remain stubbornly higher in the 3-4% range in the near future,’ Williamson concluded.

The flash PMIs are compiled by S&P Global from responses to surveys sent out to around 650 manufacturers and 650 service providers in the UK. Responses are collected in the second half of the month.