UK services sector posts fastest growth in eight months; Fed’s Powell urges prudence on interest rate cuts – business live

Sterling has hit its lowest level against the US dollar this year, despite the encouraging rise in service sector growth.

The pound has lost half a cent against the dollar to $1.2579, the lowest level since 13 December.

This is due to dollar strength – the greenback has rallied by 0.35% this morning, after Fed chair Powell warned of the risks of cutting interest rates too early. The dollar also rallied strongly on Friday, after the blowout non-farm payroll jobs report.

Central banks must beat inflation before cutting interest rates, says OECD

Phillip Inman

The OECD is also warning central banks should be certain they have beaten inflation before cutting interest rates this year, my colleague Phillip Inman reports.

The Paris-based thinktank, which represents 38 countries, said it was “too soon to be sure that underlying price pressures are fully contained”.

UK inflation has been forecasted to fall sharply this year after a steep drop in the cost of energy and fuel back towards pre-pandemic levels.

The OECD said a forecast in November had underestimated the waning of inflationary pressures in the UK and an average rate of 2.9% expected this year was more likely to be 2.8%. The US inflation rate in 2024 would be 2.2%, down from a previous forecast of 2.8%.

This rather chimes with the comments from Federal Reserve Jerome Powell to 60 Minutes last night, when he explained the Fed should be prudent when deciding when to start cutting rates.

Newsflash: The OECD has lifted its forecast for global growth this year, helped by a stronger performance from the US.

In its latest economic outlook, the OECD has raised its globl growth forecast for 2024 to 2.9%, up from 2.7% three months ago.

America’s economy is now expected to grow by 2.1% this year, better than the 1.5 % previously expected.

But the eurozone’s growth forecast has been cut, from 0.9% to just 0.6%, as the slowdown in Germany weighs on Europe. Germany is forecast to see the weakest expansion in the G7 this year at just 0.3%.

The OECD still expects the UK to grow by 0.7% this year.

And it warns that attacks on Red Sea shipping lanes could add to inflationary pressures.

Today’s report estimates that if a surge in shipping costs persisted annual OECD import price inflation could increase by close to 5 percentage points, adding 0.4 percentage points to consumer price inflation after about a year.

Newsflash: The UK’s services sector has posted its strongest monthly performance since last May.

Services sector firms have reported a faster rise in business activity and new orders in January, spurring them to hire more staff.

This lifted the UK services PMI index up to 54.3 in January, up from 53.4 in December, the third month running it’s been over 50 points (showing growth), and an eight-month high.

Encouragingly, cost inflation eases to the joint-lowest rate since February 2021, thanks to lower fuel costs and raw material prices, although staff salaries continued to rise.

Tim Moore, economics director at S&P Global Market Intelligence, says:

“The revival in UK service sector performance gained momentum at the start of 2024, with output growth accelerating to its fastest for eight months amid stronger business and consumer spending. New orders have also rebounded this winter as receding recession risks and looser financial conditions led to greater willingness-tospend among clients.

Inflationary pressures subsided during January, despite stronger demand conditions. Latest data indicated that total input costs increased at one of the slowest rates seen in the past three years. Softer cost inflation reflected lower energy and fuel costs, alongside falling raw material prices.

Service providers reporting an increase in their operating expenses overwhelmingly linked this to elevated wage pressures. This resulted in another month of robust rise in average prices charged, although the speed of inflation dipped to a four-month low.

A combination of falling inflation and improving order books provided a strong boost to business activity expectations across the service economy. The degree of optimism regarding year ahead growth prospects was the highest since April 2023. Another uplift in business confidence in January provides a signal that elevated levels of geopolitical uncertainty have yet to exert much of a constraint on service sector growth projections for 2024.”

The UK has registered its one millionth electric car, new data from industry group the Society of Motor Manufacturers and Traders (SMMT).

The SMMT has reported that 20,935 battery-powered electric cars (BEVs) were registered in January, around 21% more than a year ago.

That has lifted the overall total since 2002 to 1,001,677, which the SMMT says is “testament to the commitment of manufacturers to deliver ever-increasing numbers of zero emission models”.

Overall, the UK car market grew by 8.2% in January, the SMMT says, which is the 18th month in a row.

But sales to private buyers fell by 15.8%, while the fleet market (sales to businesses) grew nearly 30%.

Mike Hawes, SMMT chief executive, said chancellor Jeremy Hunt should do more to help the electric car market in next month’s budget:

It’s taken just over 20 years to reach our million EV milestone – but with the right policies, we can double down on that success in just another two.

Market growth is currently dependent on businesses and fleets. Government must therefore use the upcoming Budget to support private EV buyers, temporarily halving VAT to cut carbon, drive economic growth and help everyone make the switch.

Manufacturers have been asked to supply the vehicles, we now ask government to help consumers buy the vehicles on which net zero depends.

Another blow for Germany: its service sector has shrunk for the fourth consecutive month in January.

Data provider S&P Global has reported that business activity across Germany’s service sector fell for a fourth straight month in January, at the quickest rate since last August.

The decline was driven by ongoing weakness in demand, S&P Global reports.

Its German services PMI business activity index dropped to a five-month low of 47.7 for last month, down from December’s 49.3. Any reading below 50 shows contraction.

Dr. Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, said:

“Bad ending, even worse start. This is the summary of the German service sector at the start of the year, as the corresponding PMI has deteriorated further in January from the subdued December level.

One painful fact is that new business has shrunk for the seventh month straight and its downward momentum gained pace for the second successive month. Remarkably, outstanding business is experiencing its most rapid decline since June 2020. This is possibly hinting at a wave of order cancellations by clients.

Good news: the UK’s unemployment rate is lower than previously thought.

The Office for National Statistics has released new Labour Force Survey (LFS) data which show that the UK’s jobless rate is 3.9% in the last quarter, not the 4.2% estimated before.

But more worryingly, the ONS has also revised up its estimate of the inactivity rate to 21.9% in the three months to November, from the 20.8% recorded previously.

This new data follows a rejig of the LFS, which had become unreliable due to a poor response rate from the public.

Today’s new data shows that the UK population is now estimated to have increased by more than previously thought.

Hannah Slaughter, senior economist at the Resolution Foundation, says the data shows the jobs market is bigger but weaker than previous estimates.

“Britain has a bigger, but sicker, workforce than we previously thought. Of particular concern is that the fact that a record 2.8 million people in the country are currently inactive due to ill-health.

“Tackling rising ill-health is a huge social and economic challenges that we’ll be facing throughout the 2020s, as will getting the UK employment back up to and beyond pre-pandemic levels.”

Germany’s manufacturers have suffered a sharp fall in exports, as concerns over the health of Europe’s largest economy mount.

Exports fell 4.6% month-on-month in December, and were also 4.6% lower than a year ago, new figures from the federal statistics body show.

The fall in exports was broad-based; sales to other eurozone countries fell by 5.5% month-on-month, compared to a 3.5% drop in exports to the rest of the world.

Destatis reports:

Most German exports went to the United States in December 2023.

After calendar and seasonally adjusted adjustments, 5.5% fewer goods were exported there than in November 2023. This means that exports to the United States fell to a value of 12.7 billion euros.

Exports to the People’s Republic of China fell by 7.9% to 7.5 billion euros, exports to the United Kingdom fell by 4.3% to 7.4 billion euros.

German imports also dropped – down 6.7% compared with November, and a chunky 12.4% compared with December 2022. That indicates weakening domestic demand.

Last month at Davos, Germany’s finance minister denied Germany was the “sick man of Europe.”

Instead, Christian Lindner insisted Germany was “a tired man after a short night,” who needed a “good cup of coffee“ – in the shape of structural reforms…

Germany is currently on the brink of recession, after shrinking by 0.3% in the fourth quarter of 2023. Its economy has barely grown over the last year, hit by high energy costs, while its car sector has become too reliant on China – as covered here:

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

America’s top central banker has pushed back against expectations of a flurry of interest rate cuts this year, while flagging that borrowing costs will be lowered at some point in 2024.

Jerome Powell, head of the US Federal Reserve, told CBS’s 60 Minutes that the Fed was alert to the danger of moving too soon and cutting rates before inflation was fully tamed.

He warned:

The danger of moving too soon is that the job’s not quite done, and that the really good readings we’ve had for the last six months somehow turn out not to be a true indicator of where inflation’s heading.

We don’t think that’s the case. But the prudent thing to do is to, is to just give it some time and see that the data continue to confirm that inflation is moving down to 2% in a sustainable way.

US CPI inflation was recorded at 3.4% per year in December, above the Fed’s target of 2%, but down on the 6.5% recorded in December 2022.

The Fed currently sets its key rate at 5.25% to 5.5%, the highest since 2001, and many investors – and borrowers – are keen to see it cut.

Powell explained that the US Fed must balance the risks of moving too soon, versus reacting too late, adding:

And there are different risks. We think the economy’s in a good place. We think inflation is coming down. We just want to gain a little more confidence that it’s coming down in a sustainable way toward our 2% goal.

(The Bank of England made rather similar comment last week.)

Powell told 60 Minutes that “almost every single person” on the Fed’s Open Market Committee believes that it will be appropriate to reduce interest rates this year.

And he indicated that policymakers are sticking with their forecast last December that they will make three quarter-point cuts to rates in 2024.

Powell said the Fed would issue new forecasts at its next meeting in March, but added:

Nothing has happened in the meantime that would lead me to think that people would dramatically change their forecasts.

Powell added that it is “not likely” that the FOMC would feel confident enough to cut rates in March.

The financial markets are anticipating at least five rate cuts in 2024, although the odds of a cut in March fell further last Friday after a surprisingly strong US jobs report.

The agenda

• 9am GMT: UK car sales for January

• 9am GMT: Eurozone services PMI for January

• 9.30am GMT: UK services PMI for January

• 10am GMT: OECD to release Interim Economic Outlook

• 2.45pm GMT: US services PMI for January