Booming services sector steers UK economy further away from recession

Britain’s economy is running at its strongest level in nearly a year, powered by households still splashing the cash amid the cost of living crisis in another sign the country will skirt a recession.

A new survey out last night from consultancy BDO revealed output growth in the UK reached its highest level in eight months in April.

The company’s production index hit 99.8 last month, far above the 95 point threshold that separates growth and contraction.

Bumper activity in the UK’s services sector – which generates about £2 in every £3 in the country – has hoisted the overall economy away from the bleak forecasts tabled at the turn of the year.

Bank of England officials and experts at the Office for Budget Responsibility just a few months ago were warning of a tough recession this year, but those bets have been trashed due to stronger spending.

Figures out this Friday are also anticipated by the City to show gross domestic product (GDP) – which measures all goods and services made in the UK – to have edged 0.1 per cent higher in the first three months of this year, putting the country on track to avoid a technical recession in the first half of 2023.

However, eleven straight interest rate rises from the Bank to 4.25 per cent and flimsy global supply chains have held back British factories, keeping output growth pegged. Rates are tipped to rise again on Thursday by 25 basis points.

BDO’s manufacturing output index slipped to 82.94 in April, “its worst performance in almost three years, since the early months of the pandemic,” the firm said.

By contrast, the services index jumped 4.53 points to 98.22, the best improvement since January 2022, taking it to the highest level since August 2022.

Kaley Crossthwaite, partner at BDO, said: “A tale of two sectors has emerged over the past few months as the resilience of the UK economy relies almost solely on the outlook for the improving services sector, as manufacturing businesses face an ongoing downturn.”

Inflation, which has been running in the double digits since last summer and is currently more than five times the Bank’s two per cent target at 10.1 per cent, is falling.

“April saw the BDO Inflation Index dip to its lowest point in 18 months. The index now stands at 107.55 points as both input and consumer price pressures subsided,” the survey said.

Sharp declines in international energy prices are forecast to bring inflation down this year. However, food prices are still rising rapidly, hitting middle income and poorer households.