UK businesses have kicked off 2026 with unexpected vigour, as the latest flash Purchasing Managers' Index (PMI) data underscores a marked acceleration in growth. The headline Composite PMI Output Index rose from 51.4 in December to 53.9 in January, marking the strongest expansion since April 2024 and one of the best readings since the post-COVID rebound in 2022. This level points to quarterly GDP growth approaching 0.4%, a significant step up from the modest 0.1% estimated for Q4 2025.

Drivers of the Upturn

The resurgence was propelled by higher demand from both domestic and export markets, with new orders growing at the fastest pace since October 2024. Exports saw their largest rise since July 2024, particularly aiding manufacturing's gathering recoverythe first notable goods export increase in four years. Services led the charge, with financial services and technology sectors reporting the strongest expansions, while stabilising backlogs of work signal a healthier order book after years of decline.

Business optimism has also rebounded to its highest since before the 2024 Autumn Budget, reflecting resilience amid recent geopolitical tensions. Companies attribute the upturn to improved inflows of new business, helping to offset prior uncertainties from Budget speculation and tax hikes.

Tempering Factors: Jobs and Inflation

Despite the positive momentum, the survey highlighted persistent headwinds. Employment fell sharply for the fourth consecutive month since October 2024, with net job losses blamed on elevated staffing costs from higher National Insurance contributions and Minimum Wage increases introduced in the Autumn Budget. Hospitality bore the brunt of these cuts.

Price pressures intensified, with selling prices rising at the fastest rate in five monthsdriven by service sector inflation hitting a nine-month high, often linked to labour costs. This suggests consumer price inflation could hover around 3% into mid-2026, exceeding the Bank of England's 2% target, even as input costs held steady at elevated levels.

Monetary Policy Implications

The data arrives after the Bank of England's December rate cut to 3.75%, its lowest in three years. While output strength and price upticks may prompt policymakers to pause further easing, the employment downturn could fuel calls for stimulus if inflation moderates. Analysts note the PMI's alignment with official data underscores its reliability as a forward indicator.

Broader Context

• Government borrowing fell sharply in December due to higher tax receipts, though it remained high historically, with potential fiscal relief if rates ease further.
• Retail sales rebounded 0.4% in December, led by a 4.2% online surge, but investment sentiment stays fragile amid Vanguard's £2bn UK equity withdrawal.
• Economic uncertainty affects 31% of trading businesses, with labour costs topping challenges for larger firms at 36%.

This PMI flash release stands as the pre-eminent indicator today, offering a bullish counterpoint to lingering risks and setting an optimistic tone for the year ahead.