Business services darken Brexit clouds over UK

Britain’s economy is likely to lose momentum in the second half of 2017, according to a closely watched survey that could disappoint some Bank of England officials who want to raise interest rates for the first time in a decade.

Business services darken Brexit clouds over UK

Sterling dipped after the Markit-CIPS survey showed growth across British services companies fell to a four-month low in June.

Although the survey suggested the UK economy recovered some speed in the second quarter and probably expanded at a quarterly pace of around 0.4%, double the pace of the weak first quarter, there were some ominous signals in the PMI’s forward-looking gauges.

The eurozone’s economy, meanwhile, probably grew nearly twice as fast, by 0.7%, during the second quarter. Eurozone business expectations dipped, but remained strong.

In other upbeat news for ECB policymakers, retail sales increased by more than expected in May, European statistics office Eurostat said.

“This (the UK survey) shouldn’t come as a surprise,” said Peter Dixon at Commerzbank of the British findings.

“The UK is suffering the fallout from the Brexit (vote) of last year ... and has clearly moved onto a slower growth path.” UK business expectations sank to their weakest level since last July’s dip after the vote in June 2016 to leave the EU, and it was not far off lows last reached in late 2011.

Earlier this week, Bank of England rate-setter Michael Saunders said he was “reasonably confident” that lower consumer spending will be offset by higher exports and investment, justifying his vote to raise interest rates from a record low 0.25%.

The reduced pace of expansion in the services sector adds to growing evidence that the UK economy is feeling the impact of the uncertainty triggered by last year’s Brexit vote. Still, faster inflation is pushing some Bank of England policymakers to step up their hawkish rhetoric, which is weighing on government bonds.

“But the latest PMI survey pours some cold water on that hypothesis,” said JPMorgan economist Allan Monks. “Indeed, it is worth highlighting that the weakness in the UK PMI comes at a time when the broader European PMIs have strengthened considerably,” Mr Monks said.

The mood among UK services firms was probably hit by uncertainty after June’s election, in which Prime Minister Theresa May gambled away her parliamentary majority, and by Brexit talks, as well as the economic outlook, IHS Markit said.

A third monthly drop in car sales in June — albeit from recent record highs — underlined the slowdown among consumers.

Separate UK official data showed productivity, arguably Britain’s biggest economic problem over the last decade, fell in the first three months of the year — the first decline since late 2015.

The latest productivity data further complicates the outlook for Bank of England policymakers. Although weak productivity reduces the scope for future wage growth, it goes hand-in-hand with higher inflation.

“Unless more is done to tackle the nation’s low productivity, people’s wages and living standards will continue to fall and the UK will be ill-equipped to compete once we do leave the EU,” said Ian Brinkley, acting chief economist at the Chartered Institute of Personnel and Development.

“This weaker reading pours a degree of a cold water on the latest hawkish messages emanating from the Bank of England,” said James Smith at ING.

The final composite PMI for the eurozone was 56.3 in June, down from May’s 56.8 but comfortably beating a flash estimate of 55.7 and well into growth levels above 50. Earlier PMIs from the bloc’s big four economies of Germany, France, Spain and Italy showed faster growth in the second quarter as a whole.

In the UK, Prime Minister May refused to buckle to calls from the opposition and some of her senior Conservative ministers to drop the pay cap for public sector workers.

Ms May was badgered on the issue by opposition Labour leader Jeremy Corbyn during a parliamentary question-and-answer session.

While the UK government will “carefully” review recommendations for those civil service occupations on which pay bodies have yet to report — such as police, prison officers and teachers — the existing 1% cap has already been accepted by most, she said.

“I understand why people feel strongly about their pay,” Ms May said. But her government “will always recognise the need to ensure that we take those decisions against the need to live within our means.”

Reuters and Bloomberg

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