Market News

By William Schomberg

LONDON (Reuters) - A flurry of often contradictory UK economic data and surveys this week has left the Bank of England none the wiser about whether Britain's economy is more at risk of a wave of job losses or a new period of persistently high inflation.

A closely watched survey of businesses - the Purchasing Managers' Index - suggested on Friday that firms this month cut staff at the fastest pace since the COVID pandemic, and almost as sharply as after the collapse of U.S. investment bank Lehman Brothers at the height of the global financial crisis in 2008.

'STAGFLATION' DILEMMA

But the often conflicting signals show why the central bank has said it will move only gradually and carefully with its next rate cuts after lowering them for only the third time since August this month.

"It all confirms this policy dilemma for the Bank of England and the stagflationary situation that the UK finds itself in," Ross Walker, head of global economics at NatWest Markets, said.

It also creates a difficult picture for Reeves who may have to announce further public spending restraint or higher taxes next month if she is judged to be off course to meet the fiscal targets that she set herself less than four months ago.

Figures published on Friday showed weaker than expected tax revenues in January.

Britain's economy barely grew in the second half of 2024 and the BoE recently halved its forecast for growth in 2025 to just 0.75%. But it also expects inflation to peak at 3.7% between July and September, up from 3.0% now, before falling back.

Some economists now think inflation could hit 4%, double the BoE's target.

The slow-growth, sticky-inflation conundrum facing the BoE was highlighted by the PMI survey on Friday.

As well as cutting jobs, businesses said they were facing higher costs as suppliers jacked up their prices in anticipation of April's higher social security costs and an increase in the minimum wage.

Rob Wood, chief UK economist at consultancy Pantheon Macroeconomics, said the BoE might take some comfort from signs in the PMI that services firms were absorbing some of their higher costs rather than passing them on via higher prices, but history suggested they would try to rebuild their margins soon.

"All told, the Monetary Policy Committee will have to be cautious as the employment balance looks too catastrophic to be plausible while price balances look too plausible to be ignored given the strong labour cost pressures coming down the line," Wood said in a note to clients.

(Writing by William Schomberg; Editing by Susan Fenton)