UK economy falters as Omicron wave hits service sector
The UK economy faltered in January, a closely-watched survey showed on Monday, after the rapid spread of Omicron weighed heavily on the service sector.
The flash IHS Markit/CIPS UK Composite Output Index fell to an 11 month-low of 53.4, compared to December’s final reading of 53.6. Most analysts had expected a rise, with consensus at 54.0.
Within that, the flash manufacturing output index strengthened to a five-month high of 53.8 from 53.6 in December. But the manufacturing PMI eased to 56.9 from 57.9, while the services business activity index was 53.3, an 11 month-low compared to December’s 53.6.
IHS Markit noted: "With hospitality, leisure and travel all struggling due to Omicron restrictions, this offset resilient growth in business and financial services."
Manufacturers fared better during the month as material shortages started to ease. But staff absences affected all sectors, while input cost inflation remained "stubbornly high", largely reflecting stronger cost pressures in the service sector.
Chris Williamson, chief business economist at IHS Markit, said: "A resilient rate of economic growth in the UK during January masks wide variations across different sectors. Consumer0facing businesses have been hit hard by Omicron, and manufacturers have reported a further worrying weakening of order book growth. But other business sectors have remained encouragingly robust.
"Looking ahead, while the Omicron wave meant the hospitality sector has sunk into a third steep downturn, these restrictions are now easing, meaning this downturn should be brief."
Duncan Brock, group director at Chartered Institute of Procurement & Supply, said: "Though professional and financial services in particular saw a resurgence in activity, hospitality and travel firms took another body blow as the market place stagnated.
"In the gloomiest month of the year, what is also disappointing for the UK economy is price inflation returning with a vengeance, with the second-highest jump in business expenses since 1998.
"The private sector may be experiencing a sense of two steps forward and one step back with price and supply challenges, but with the strongest level of optimism since August 2021, we may be looking forward to a more favourable trading environment in the months ahead."
Pantheon Macroeconomics noted: "The further drop in Markit’s composite PMI in January suggests that the Omicron variant continued to weight on activity in the first half of the month.
"As things we stand, we think that GDP dropped by a further 0.2% month-to-month in January, after dropping by about 10.0% in December.
"The drop in the composite PMI, however, likely won’t dissuade the [Bank of England's] Monetary Policy Committee from increases the Bank Rate at next week’s meeting. For a start, some of the survey’s forward-looking indicators improved: the new orders index of the services survey rose from 56.5, and businesses were the most upbeat about the outlook for in demand since August.
"In addition, near-real-time data show that activity has started to recover as January has progressed, indicating that month-to-month growth in GDP in February likely will be positive."
The survey was sent to panels of around 650 manufacturers and 650 service provides, with responses collected between 12 and 20 January.