Pounds sterling soars to new highs

The UK economy is expected to avoid recession if the latest survey by S&P Global PMI is anything to go by. The survey indicates that UK private sector firms signaled a solid rebound in business activity in February, ending a six-month period of falling output. The Composite PMI rose to 53 in February, smashing expectations for a reading of 49. This represents a significant step-up in activity on January’s 48.5. A reading below 50 indicates contraction, while a reading above signifies growth.

The UK Pound surged against the Euro, Dollar, and other currencies in response to the positive survey findings. The Pound to Euro exchange rate rose by more than half a percent, while the Pound to Dollar exchange rate rose two-thirds of a percent in the same timeframe.

According to S&P Global, the survey respondents cited rising customer demand and improving business confidence in February, due to lower economic uncertainty, fewer supply shortages, and falling inflation. Stronger customer demand contributed to renewed increases in backlogs of work and employment across the private sector economy during February. The prospect of a stronger economic outlook and higher interest rates is supportive of the British Pound, which remains subject to ongoing negativity among financial analysts and market participants.

However, some economists, including Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics, caution that it would be premature to conclude from the jump in the composite PMI to well above 50 in February that the economy has avoided a recession. Tombs says it is unlikely the UK has avoided a recession despite the positive headlines. Pantheon Economic says UK GDP will probably drop in both the first and second quarters as households’ real disposable incomes continue to decline in response to further increases in consumer energy prices and as households refinancing mortgages continue to cut back.

The findings suggest that the economic recession and rise in unemployment long forecast by the Bank of England is still out of reach. Nevertheless, the Bank of England will take note of PMI findings that businesses say rising staff salaries have led to a sustained increase in the prices charged to consumers. The Bank of England has said it remains alert to wage pressures as it seeks to bring inflation down by raising interest rates. Markets are currently expecting another 25 basis point hike in February, and then a potential pause.