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UK business activity grew more than expected in April as surging costs and shortages triggered by the Iran war hurried companies into making purchases, according to a closely watched survey.
The snapshot of private sector activity underlines how the effects of the conflict have reverberated across the economy, with businesses stung by a rise in costs since the US and Israel launched strikes in late February and fearing that prices could still head higher.
The S&P Global Flash UK PMI composite output index, a measure of activity in the manufacturing and services sectors, climbed to 52 in April, from 50.3 in March.
Thursday’s reading was above the 50 mark, indicating a majority of businesses surveyed had reported a rise in activity during the month. Economists polled by Reuters had expected the index to decline to 49.9.
In an indication of the price pressures facing businesses, the index showed that input cost inflation in the manufacturing sector climbed to the highest since November 2022.
Higher fuel prices drove an increase in costs for the bigger services sector in April, with the acceleration in cost inflation the most for a single month since the index began in July 1996.
The survey comes ahead of a meeting next week of rate-setters at the Bank of England, who will consider how to respond to the energy shock triggered by the closure of the Strait of Hormuz and strikes on Gulf infrastructure.
Paul Dales, economist at the consultancy Capital Economics, said that the April PMI survey suggested “that so far the economy is holding up better against the headwinds from the Iran war than in our baseline scenario, but that the upside risks to inflation appear to be bigger”.
He added that “this could lead some at the Bank of England to worry more about the upside risks to inflation than the downside risks to activity”.
Following the release of the survey, traders lifted bets on how quickly the MPC would raise interest rates to contain resurgent inflation.
According to levels implied by the swaps market, traders anticipate the MPC will hold interest rates at 3.75 per cent next week but deliver two quarter-point rate increases by November, compared with an expectation of December before the release of the data.
The latest evidence of rising price pressures in the UK comes a day after official figures showed inflation rose to 3.3 per cent in March, led by higher petrol prices and up from 3 per cent in February.
According to the PMI survey, a gauge of the prices charged by businesses in April rose to the highest since February 2023, indicating that companies were attempting to pass on higher costs to customers.
Rob Wood, economist at Pantheon Macroeconomics, said: “We think that the signs of OK growth combined with rising price pressures keep the risks tilted towards the MPC hiking rates this year rather than keeping them on hold.”
In another sign of the repercussions from the conflict, figures from the Office for National Statistics on Thursday showed the UK borrowed a higher than expected £12.6bn in March.
But for the full fiscal year to March, UK borrowing was £132bn, 13.1 per cent below the previous fiscal year, as an increase in tax receipts offset a rise in spending. The full-year figure also undershot the £132.7bn forecast by the Office for Budget Responsibility last month.
Additional reporting by Ian Smith
