World Economy

UK Business Optimism Evaporates

With new orders at a nine-month low, firms’ confidence in the outlook has dipped and households are warned to prepare for interest rates to go higher at some point
With interest rates at a record low, shoppers have borrowed and run down the rate at which they save to fuel spending and prop up the economy since the Brexit vote.With interest rates at a record low, shoppers have borrowed and run down the rate at which they save to fuel spending and prop up the economy since the Brexit vote.

Growth in Britain's services sector weakened to its lowest in four months in June, according to a Markit survey published on Wednesday that also found business optimism dropped to its second-lowest in over five and half years.

The UK Markit/CIPS services purchasing managers' index for June fell to 53.4 from the prior month's 53.8 and shy of the consensus forecast of 53.5, ShareCast News reported.

Following disappointing PMIs for the manufacturing and construction sectors earlier in the week it meant the UK composite PMI for June dropped to 53.8 from 54.3 and below the market's expectation of 53.9.

Levels of business optimism also declined to the weakest since December 2011, Markit revealed, save for the post-referendum dip last summer, while new orders increased at the slowest rate for nine months.

With the services sector representing more than three quarters of the economy, the weaker growth and business optimism casting a pall over the UK's growth prospects in coming months.

The output prices balance fell to 51.8 in June, its lowest level since July 2016, which indicated homegrown inflation pressures remain modest and that the effect of the pound's weakness has passed its peak.

Losing Momentum

Chris Williamson, chief business economist at IHS Markit, said: "Although the three PMI surveys are running at levels that are historically consistent with GDP growing by around 0.4% in the second quarter, it's clear that the economy heads into the third quarter losing momentum.

"With business optimism having been hit by the intensification of political uncertainty following the general election and commencement of Brexit negotiations, at the same time that households are battling against rising inflation, the indications are that the economy's resilience is being tested.

Markit noted pockets of growth, notably in financial services and business services, but the overall picture was dimmed by levels of business spending, investment and exports failing to provide sufficient impetus to fully offset the consumer slowdown.

Even so, with new orders at a nine-month low, firms confidence in the outlook has dipped, output prices indicate underlying inflation pressures remain modest, survey therefore "strengthens the hand of MPC members arguing that interest rates do not need to rise this year to tame inflation".

BoE Warns of Rate Increase

Ten years since the Bank of England last raised interest rates, policy makers are warning Britons to prepare for the next one, Bloomberg reported.

“Our foot is pretty much on the floor with the accelerator,” Michael Saunders, a member of the rate-setting Monetary Policy Committee, told The Guardian in an interview published late on Tuesday. “Households should prepare for interest rates to go higher at some point.”

The comments came on the same day that the central bank told lenders to prove they’re not underestimating the risks of rapidly growing consumer credit given the current “benign economic environment.” With BoE interest rates at a record low, shoppers have borrowed and run down the rate at which they save to fuel spending and prop up the economy since the Brexit vote, with many first-time borrowers never having experienced an increase in official borrowing costs.

Governor Mark Carney said last week that “some removal of monetary stimulus is likely to become necessary,” tweaking his previous remark that it’s not yet time to start making that adjustment. I don’t think the economy needs as much stimulus” as it currently has, said Saunders, who voted for tighter policy in June. “But if rates do go up, it will be in the context of the economy doing OK and unemployment being low and probably falling.”

Lifting Policy

A report showing services growth slowed in June indicated that the UK recovery may still be uneven as the government starts talks to leave the European Union. IHS Markit said that while GDP growth probably improved to 0.4% in the second quarter, it is likely to cool again in the three months through September.

The BoE isn’t alone in contemplating lifting policy from emergency levels. The US Federal Reserve started increasing rates in December 2015. Investors see Canada raising rates next week for the first time since 2010, and European Central Bank officials have started talking about how to signal winding down stimulus.

BoE's Saunders and Ian McCafferty have called for tighter policy, while Chief Economist Andy Haldane has said he’s considering it.


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