World Economy

Cracks Appear in UK Resilience

Cracks Appear in UK ResilienceCracks Appear in UK Resilience

Confidence among the UK’s dominant services firms has slumped to a three-year low as “cracks” appear in the country’s resilience to looming threats, experts have warned.

Fears over a potential Brexit, a Chinese slowdown and recent volatility in financial markets has pushed the business mood “to its darkest for three years”, according to the Chartered Institute of Procurement and Supply’s latest activity index, compiled by financial data firm Markit, news outlets reported.

The CIPS snapshot is likely to give even more reason for caution on interest rate rises from the Bank of England’s Governor Mark Carney and the rest of the monetary policy committee, which publishes its latest decision Thursday alongside its quarterly inflation report forecasts. Rates have been at 0.5% since March 2009.

The CIPS data covers the UK economy’s biggest sector, accounting for three-quarters of growth and ranging from transport, computing and professional services to hotels and restaurants.

Its activity index, where a score over 50 signals growth, was virtually unmoved at 55.6—showing solid growth for now.

But the fall in confidence to the lowest since early 2013 as well as softening new orders among services firms leaves the economy facing a potentially tricky period, according to Markit’s chief economist Chris Williamson.

He said: “The economy defied expectations and picked up speed in January, but cracks continue to appear in the country’s resilience… The increased uncertainty about the outlook and persistent lack of inflationary pressures means most bank policymakers will no doubt be more worried about avoiding another downturn than whether the economy needs higher interest rates.”

  Threats Rise

Chancellor George Osborne warned last month that the country faces a “dangerous cocktail” of risks from the global economy, and economists cite threats from rising bills in April because of the new national living wage.

CIPS chief executive David Noble added: “There are concerns that this period of stasis may continue for some time yet, which means that any imminent rises in UK interest rates are more likely to be delayed.”

Markit says its latest batch of surveys on manufacturing and construction and services are consistent with improved growth of 0.6% in the latest quarter if continued in February and March. But the Bank of England is poised to cut its growth and inflation forecasts in its report Thursday, having predicted in November a 2.5% advance for the economy this year.

  Inflation Swaps

Its inflation forecasts will also be slashed after steeper-than-expected falls in the oil price to $33 a barrel. Pantheon’s chief economist Samuel Tombs said: “The UK’s economic recovery is a shadow of its former self”.

Sterling forward inflation swaps, a gauge of price expectations, have given up most of 2015’s gains as the slowdown in China and a continued slump in oil prices are adding to disinflationary pressures.

The five-year inflation swaps rate, locked five years ahead, is at 3.18%, near a nine-month low touched last month, indicating investors have pushed back expectations for a Bank of England rate increase before a scheduled policy review on Thursday. The measure touched a peak of 3.48% last year as the tightening of labor markets showed the economy was improving.

  Jobless Rate

The UK unemployment rate has fallen to its lowest rate in more than a decade but wage growth has slowed.

The rate hit 5.1% in the three months to November–its lowest rate since the three months to October 2005, according to the Office for National Statistics.

The number of people out of work fell by 99,000 to 1.68 million in the three-month period.

Average weekly earnings, including bonuses, were up 2%, the slowest increase since February. Excluding bonuses, average weekly earnings growth slowed to 1.9% in the three months, the ONS said.

The figures show that the employment rate hit 74%–the highest since comparable records began in 1971.