UK downturn much milder than expected in February - PMI

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People walk through the Canary Wharf financial district of London, Britain, December 7, 2018. REUTERS/Simon Dawson

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LONDON, Feb 19 (Reuters) - British firms fared less badly during February's lockdown than feared and are upbeat about the prospects for growth later in 2021 when they hope the roll-out of vaccines will allow a major relaxation of COVID-19 restrictions, a survey showed on Friday.

The IHS Markit/CIPS flash composite Purchasing Managers' Index (PMI) jumped to 49.8 in February from 41.2 in January, a much sharper improvement than had been expected by any of the economists polled by Reuters.

The index suggests activity stabilised this month after a big fall in January when the country went into its third lockdown since the pandemic reached Britain last March.

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"Although the data hint at a renewed contraction of the economy in the first quarter, business expectations for the year ahead improved to the highest for almost seven years, suggesting the economy is poised for recovery," IHS Markit's chief business economist, Chris Williamson, said.

Britain's economy shrank 9.9% last year, the biggest decline in more than 300 years, but the Bank of England predicts growth of 5% this year and for output to return to pre-pandemic levels early next year.

New COVID cases in Britain have now fallen by more than three quarters since a peak at the turn of the year, but Prime Minister Boris Johnson has said any relaxation of rules will be gradual due to the risks posed by new variants of the disease.

IHS Markit said that hotels, restaurants and transport and travel companies reported steep falls in activity this month but at a slower pace than in January. Financial and business services firms enjoyed modest growth.

The PMI does not cover British retailers, but separate figures from market research company GfK on Friday showed consumer sentiment was the strongest since the start of the pandemic, again largely based on recovery hopes. read more

Manufacturers - who account for about 10% of Britain's economy - have outperformed services businesses in recent months because they are less affected by COVID restrictions.

But they are seeing their relative advantage slip as they face higher raw material costs, supply chain disruption and difficulty with exports since the introduction on Jan. 1 of new, post-Brexit trading restrictions with the European Union.

The PMI's factory output component fell sharply in January and edged down further this month to its lowest since the depths of the first lockdown in May, when many factories had closed their doors.

"More than half of all companies reporting lower exports attributed to the decline to Brexit-related factors. Brexit was also the most commonly cited cause of supply delays," Williamson said.

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Reporting by David Milliken; Editing by Hugh Lawson

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