Brighter economic outlook lifts UK services sector, PMI shows

Fall in overall cost pressures had yet to be fully passed onto clients as demand remained resilient.

LONDON (Reuters) - Britain's dominant services sector grew at the fastest pace in eight months in February, boosted by stronger business confidence and an improved economic outlook, a survey published on Friday showed.

But higher borrowing costs and squeezed household finances continued to limit growth.

The final version of the S&P Global/CIPS UK services Purchasing Managers' Index (PMI) increased to 53.5 last month, up from 48.7 in January, the strongest rate of growth since June last year. Any reading above 50 represents an expansion.

S&P Global said the recovery in business activity in the services sector, which grew for the first time since August, was partly linked to expectations of interest rates peaking.

Financial markets expect the Bank of England's main rate to top out at 4.75% in August, up from 4.0% now.

Friday's reading was marginally stronger than the preliminary flash estimate for February of 53.3.

It chimed with some other indicators of Britain's economy that have improved in recent weeks, reducing the threat of a lengthy recession starting in early 2023.

Tim Moore, economics director at S&P Global Market Intelligence, said there were clear signs that input price inflation had peaked, helped by lower gas prices and shipping rates. Cost pressures eased to the lowest since June 2021.

Companies, especially those in the restaurants and hotels sector, flagged historically strong wage inflation and a surge in food costs.

But the fall in overall cost pressures had yet to be fully passed onto clients as demand remained resilient.

"Tight labour market conditions and the need to alleviate squeezed margins continued to limit the degree to which falling cost pressures were passed on to end consumers," Moore said.

The Bank of England is closely monitoring wage-setting and how companies pass on their higher costs to customers as it attempts to return double-digit inflation to its 2% target.

BoE policymakers have been split for several months over how persistent the underlying inflation pressures will prove, resulting in different views on the path of interest rates.

The PMI survey showed new order volumes grew at the strongest pace since May last year, helped by a rebound in exports and stronger demand from customers in Western Europe and the United States.

While employment rose, the rate of job creation was much softer than the average seen in 2022, the survey showed.

The composite PMI, which combines the services survey with Wednesday's manufacturing PMI, showed activity grew in February after shrinking for six months, rising to 53.1 from 48.5 in January.

Business activity expectations for the year ahead were the strongest reported in 11 months.