UK services growth offers respite for Rachel Reeves ahead of Spring Statement

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Services helped drive UK private sector output to grow more than expected in March and at the fastest pace in six months, striking a positive note for Rachel Reeves ahead of the Spring Statement on Wednesday.  

The preliminary reading of the UK S&P Composite Purchasing Managers’ Index, a measure of the health of the private sector, rose to 52 in March, up from 50.5 in February and the highest since September.

It was well above 50, which separates growth and contraction, and higher than the 50.3 forecast by economists in a Reuters poll. The PMI index for services rose to a seven-month high of 53.2.

Chris Williamson, chief business economist at S&P Global Market Intelligence, said the rise in business activity brought “some good news for the government ahead of the chancellor’s Spring Statement, offering a respite from the recent flow of predominantly downbeat economic data”.

Reeves is expected on Wednesday to set out a sharp downgrade to UK growth this year — from 2 per cent to about 1 per cent, according to forecasts by the Office for Budget Responsibility — after weaker than expected economic data since October.

Analysts expect higher government borrowing costs and slow economic growth to have wiped out the chancellor’s fiscal “headroom”, triggering billions of pounds of spending cuts as she seeks to meet her fiscal rule to balance the budget by 2029-30.

Rob Wood, economist at consultancy Pantheon Macroeconomics, said the PMIs rise showed “the economy has bottomed as firms digest the payroll tax hikes and fears of further tax rises this month fade”.

Wood said he expected the economy to grow by 0.3 per cent in the first quarter of 2025, after expanding by just 0.1 per cent in the final three months of last year and stagnating in the third quarter of 2024.

But despite the stronger PMIs reading, Williamson said business confidence was “still running close to January’s two-year low” and that improvement had been driven by “only small pockets of growth”, notably in financial services.

Consumer-facing businesses and manufacturers, which are among the companies to have hit out at the rise in employers’ national insurance contributions and the minimum wage from April, were continuing to battle economic turbulence at home and abroad, according to the survey.

While services performed strongly, the index tracking manufacturing output dropped to a 17-month low of 44.6, with companies in the sector reporting a hit to demand from rising global economic uncertainty and the prospect of US tariffs.

Weak international demand in March resulted in the fastest decline in manufacturing export sales since August 2023, according to the survey, which was conducted in the first half of the month.

The rate of job shedding slowed further in March, easing fears sparked by earlier PMI data that reported the sharpest pace of cuts to headcount since the 2008-09 global financial crisis, excluding the pandemic.

Input cost inflation also eased further from a nine-month high reached in January but remained much higher than the long-run survey average.

The Bank of England last week held interest rates at 4.5 per cent, after voting for a quarter-point cut in February, as it reiterated plans to pursue a “gradual and careful” approach to more reductions.

Financial markets are pricing between one and two quarter-point cuts by the end of the year.

Ashley Webb, economist at consultancy Capital Economics, said a weak economy would enable the BoE to lower interest rates to 3.5 per cent next year.

However, he added that the slower rate of cuts to headcount alongside businesses’ concerns about prices increased “the chances of the BoE pausing interest rate cuts a bit earlier . . . perhaps in May rather than in August”.