Growth Accelerates Despite Labour Market Weakness

UK businesses reported a solid start to 2026, with the Composite PMI Output Index rising to 53.9 in February from 53.7 in January—its highest reading since April 2024 and beating economist expectations of a decline to 53.3. The upturn continues to be led by the service sector, but manufacturing is showing signs of recovery, with export orders surging to levels not seen since the pandemic.

The expansion reflects higher demand for goods and services across the economy. However, this growth has failed to translate into job creation. Headcounts were cut sharply again in February, continuing a sustained decline that has persisted since October 2024.

Staffing Costs Drive Employment Cuts

Businesses remain focused on boosting productivity to cut costs, with companies citing policy measures announced in the 2024 autumn Budget and 2025 Budget as key drivers of redundancies. These measures include hikes to the National Minimum Wage and increased employer National Insurance contributions, which have made labour structurally more expensive across the economy.

Higher staffing costs have been particularly acute in the service sector, where input cost inflation remained elevated in February. This has forced businesses to accelerate selling price inflation in services to the highest rate since April 2025.

Inflation Pressures Remain Mixed

While service sector inflation has accelerated, manufacturing has provided some relief. Input cost and selling price inflation rates moderated in the manufacturing sector, helping to keep overall price pressures in check. Average prices charged for goods and services nonetheless rose at the fastest rate for ten months, with inflation picking up for a third successive month.

PMI surveys suggest that consumer price inflation may fall below the Bank of England's 2% target in the coming months before rising again to around 3% in the second half of 2026.

Mixed Business Sentiment

While manufacturing and professional services show signs of optimism, broader business confidence remains fragile. The CBI's quarterly services sector survey showed that optimism for business and professional services jumped to -3 in February from -50 in November, its highest reading since August 2024. By contrast, consumer services sentiment remained deeply negative at -45.

Bank of England policymakers are likely to be encouraged by stronger growth signals, but the modest price pressures and ongoing labour market weakness are expected to fuel calls for further interest rate cuts.