There are some tentative signs of improvement in parts of the UK economy, particularly in manufacturing.

The closely watched Purchasing Managers’ Index (PMI) for manufacturing rose to 51.8 in January, up from 50.6 in December and its highest level since August 2024. Any reading above 50 indicates growth, so the increase suggests activity in the sector is expanding again after a period of weakness.

The survey, which is based on responses from around 650 manufacturers, also reported new export orders rising for the first time in four years. Demand improved from several key markets, including Europe, the United States and China, and manufacturers reported stronger optimism about the year ahead. In fact, business confidence in the sector reached its highest level since before the 2024 Autumn Budget.

This improvement in manufacturing appears to reflect broader signs of economic strengthening.

A combined PMI reading covering both manufacturing and services indicated the fastest expansion in overall business activity since April 2024. Other economic indicators have also shown modest improvement. Retail sales beat expectations in December, while official figures showed UK GDP increasing by 0.3% in November, a stronger performance than many economists had forecast.

Confidence among business leaders is also beginning to stabilise. Separate data from the Institute of Directors showed overall economic confidence among its members improving in January to its highest level in eight months. While the headline measure remains negative overall, confidence in their own organisations returned to positive territory.

Taken together, these indicators suggest that some of the uncertainty surrounding Rachel Reeves’s November Budget may be starting to ease. In the months leading up to the Budget, speculation around tax changes had weighed on investment decisions and business spending.

However, the economic picture remains mixed.

Inflation has eased somewhat, falling to 3.4% in December, but it still sits well above the Bank of England’s 2% target. At the same time, the labour market continues to show signs of strain. Unemployment has risen to a near five-year high, and manufacturers are still reducing staff numbers, although job cuts are now occurring at the slowest pace in more than a year.

For businesses, the takeaway is that while there are early signs of recovery, the operating environment remains uncertain. Costs, interest rates and demand conditions continue to shift, which makes it important to keep a close eye on cashflow, margins and investment decisions as the year develops.

If you’d like to talk through how the current economic environment might affect your business, feel free to get in touch.