UK private sector business activity had a surprisingly poor start to 2023. The flash composite output index dropped from December's final 49.0 to 47.8, nearly 2 points short of the market consensus and its worst reading in two years.

The headline deterioration was wholly attributable to services where the flash sector PMI sank from December's final 49.9 to 48.0, also a 24-month low. By contrast, its manufacturing counterpart increased from 45.3 to 46.7, still deep in recession territory but a 3-month high.

Manufacturing output (46.6 after 44.4) fell again but at a slower pace than at year-end and in a similar vein, a sixth successive drop in aggregate new orders was the shallowest since August. Backlogs were down for a third straight month and weak demand contributed towards a marginal decrease in employment, solely in manufacturing. Even so, business sentiment extended the rally that began in November and, with gains in both sectors, January's overall reading was the strongest in eight months.

Meantime, input cost inflation eased for a second successive month and to its lowest rate since April 2021. Increased wage pressures were offset by lower fuel bills, commodity prices and shipping costs. Output prices continued to climb steeply but the latest increase was the weakest since August 2021, reflecting more constrained pricing power and smaller rises in transport and raw material costs.

In sum, today's results provide early warning of a poor start by GDP to the current quarter. This is unlikely to prevent the BoE hiking Bank Rate again next week but with the UK's ECDI and the ECDI-P now at just minus 33 and minus 38 respectively, at least some MPC members will be voting for no change.

Composite business activity in the UK is expected to remain stagnant in January, at a consensus 49.5 versus 49.0 in December which was the fourth straight month under breakeven 50.

The flash Composite Purchasing Managers’ Index (PMI) provides an early estimate of current private sector business activity by combining information obtained from surveys of the manufacturing and service sectors of the economy, around 650 companies in each case. The flash data are released around ten days ahead of the final report and are typically based upon around 75-85 percent of the full survey sample. Results covering a range of variables including manufacturing output, employment, new orders, backlogs and prices are synthesised into a single index which can range between zero and 100. A reading above (below) 50 signals rising (falling) activity versus the previous month and the closer to 100 (zero) the faster is activity growing (contracting). The report also contains flash estimates of the manufacturing and services PMIs. The survey is produced by S&P Global.

Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data such as the purchasing managers' surveys, investors will know what the economic backdrop is for the various markets. The flash PMIs are particularly closely watched as they provide a wide ranging look at economic developments and some of the most up to date information available. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly and causing potential inflationary pressures.