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UK Suffers Sharp Slowdown

Many services firms have been knocked hard by Brexit-fuelled import costs, as well as surging business rates, fuel prices and salaries
Companies blame the slowdown on the non-renewal of old contracts, bad weather and a loss of clients,  as well as uncertainty about the outcome of the Brexit negotiations.Companies blame the slowdown on the non-renewal of old contracts, bad weather and a loss of clients,  as well as uncertainty about the outcome of the Brexit negotiations.

Britain’s economy slowed sharply in January, according to a survey that cast doubt on growing expectations among investors that the Bank of England might be gearing up to raise interest rates again in the coming months.

Sterling fell and British government bonds briefly rose after financial data firm IHS Markit said growth in the world’s sixth-biggest economy looked set to slow to 0.3% in the first quarter, down from 0.5% in the last three months of 2017, Reuters reported.

The slowdown was driven mostly by Britain’s dominant services sector, where activity growth fell to a 16-month low of 53.0 last month from 54.2 in December, as measured by IHS Markit’s Purchasing Managers’ Index.

By contrast, eurozone businesses began 2018 with their strongest growth in well over a decade, IHS Markit said—figures that highlighted the gap between Britain, as it heads for Brexit, and its European neighbors.

Combined with weaker-than-expected surveys last week for Britain’s manufacturing and construction sectors, Monday’s report suggested the country grew last month at its slowest pace since just after the 2016 referendum vote to leave the European Union.

“With the survey also indicating weaker upward price pressures, the data therefore cast doubts on any imminent rise in interest rates,” said Chris Williamson, chief business economist at IHS Markit.

But George Buckley, an economist with Nomura, said the survey suggested growth might slow only to 0.4%—enough to keep the BoE on track to raise rates four times between now and the end of 2019, more than investors currently expect.

The BoE is due to announce new economic forecasts on Thursday and investors are watching for any signs that it is moving towards a rate hike in the coming months, after it raised rates in November for the first time in a decade.

Britain’s economy grew faster than anticipated at the end of 2017, and financial markets have put a 50-50 chance on a BoE rate hike in May.

Old Contracts Blamed

Monday’s survey showed companies blamed the slowdown on the non-renewal of old contracts, bad weather and a loss of clients, as well as uncertainty about the outcome of the Brexit negotiations facing British Prime Minister Theresa May.

Although new work came in faster than in December, it was below the average for 2017. But there were some positives. Job creation picked up as services firms remain positive about the outlook and business confidence was the highest since March 2017.

Inflation in the prices charged by firms, eased to a four-month low but remained high. Input prices rose at their slowest pace since September 2016.

Respondents to the survey said that growth was curtailed by the loss of existing clients and “lingering concerns surrounding the UK’s exit from the EU”.

Brexit's Hard Knock

The services sector makes up 80% of the UK economy and ranges from hotels and restaurants to legal work and financial services, so its performance tends to set the trend for economic growth.

Many services firms have been knocked hard by Brexit-fuelled import costs, as well as surging business rates, fuel prices and salaries after the launch of the national living wage.

Efforts to offset this by rising prices comes at a tricky time for the British consumer, with households in the grip of a challenging income squeeze on the back of higher inflation and weaker wage growth.

The survey showed companies raised their prices in January, given “strong upward pressure on cost burdens,” particularly around insurance, fuel, transport and food.

But businesses polled said a sustained rise in sales, acquisitions and new offerings helped drive output expansion last month–ultimately helping to keep the PMI reading above 50.

Of the new work that businesses were able to attract in January, growth was chalked up to “successful marketing campaigns”, greater market shares and new services offerings.

James Smith, a developed markets economist at ING, said the reading dampens prospects of an imminent interest rate hike.

“Today’s data takes some pressure off the Bank of England to hike rates later this year. That said, policymakers will take heart from the better recent news on wage growth, which is showing signs of life as skill shortages become more prevalent. This means a 2018 rate hike now largely hinges on Brexit.”

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