Economy shows strongest momentum since April 2024

British businesses extended an early 2026 recovery in February, with the S&P Global UK Composite PMI climbing to 53.9 from 53.7 in January—the highest reading since April 2024, before Prime Minister Keir Starmer's government took office. PMI readings above 50.0 indicate expansion in economic activity, while those below signal contraction.

"The early PMI data for February bring further signs of an encouraging start to the year for the UK economy," said Chris Williamson, S&P Global chief business economist. The improvement comes as budget uncertainty recedes following Chancellor Rachel Reeves' fiscal consolidation efforts, with an update scheduled for March 3.

Mixed signals on employment and inflation

Despite the positive momentum, the recovery remains incomplete. Companies continue to cut jobs, tempering the overall strength of the rebound. Meanwhile, prices charged by businesses rose at the fastest pace since last April, though cost burdens—while still elevated—increased at the slowest pace in three months.

The Bank of England's February Monetary Policy Report noted that inflation remains above the 2% target, partly due to administered price increases such as Vehicle Excise Duty and higher water bills, estimated to contribute around 0.5 percentage points to the overshoot. Food, beverage and tobacco inflation accounts for a further 0.5 percentage points, while elevated labour cost growth continues to push up services inflation.

Rate cut expectations mount

With the Bank of England expecting growth of just 0.9% this year, most economists anticipate interest rate cuts beginning in March, with further reductions likely later in 2026. The Monetary Policy Committee maintained Bank Rate at 3.75% at its February 4 meeting, though four members voted for a 0.25 percentage point reduction.

Allan Monks, chief UK economist at J.P. Morgan, expects a rate cut in March but cautioned that the mixed economic picture would fuel further division within the Bank of England's decision-making committee. Market expectations suggest Bank Rate could fall to around 3.3% by the second half of 2026.

Fiscal position strengthens

A record surplus in UK public finances in January provides Chancellor Reeves with greater flexibility in her fiscal management, making it easier to maintain a low-key approach to the March 3 budget update despite longer-term fiscal challenges. The stronger-than-expected PMI data suggest that the government's consolidation efforts may be supporting business confidence without derailing economic recovery.