/UK economic growth stalls on Brexit angst

UK economic growth stalls on Brexit angst

Political uncertainty is choking off growth in the UK economy, with activity slipping to its weakest for six years as companies delay projects and hold off placing new orders.

The closely watched IHS Markit index of service sector activity fell from 51.2 in December to 50.1 in January, below expectations and at a level consistent with stagnant output.

Its release on Tuesday followed similarly weak readings from the manufacturing and construction sectors over the past week. A composite index tracking all three sectors has fallen from 51.3 in December to 50.3 in January, suggesting that output was flat.

In response, sterling fell to its lowest level in two weeks, slipping below the $1.30 mark and sharply off January’s highs of $1.32 when the threat of a no-deal Brexit appeared to have receded.

Intensifying worries over Brexit had “led to an increasingly broad-based malaise”, said Chris Williamson, chief economist at IHS Markit, which compiles the indices for the Chartered Institute of Purchasing and Supply.

He said the composite readings over the past three months were the weakest for six years, and comparisons with official data suggested growth had stalled in the first month of the year, after eking out growth of just 0.1 per cent in the last quarter of 2018.

The latest data will give Bank of England policymakers pause for thought as they meet to update their forecasts for the UK economy. Rising wage growth has made the Monetary Policy Committee inclined to raise interest rates as soon as Brexit uncertainty subsides, but a weakening outlook could lead to a more dovish tone.

“The case for a Bank of England rate hike this year continues to recede,” said James Knightley, economist at ING. He saw a risk of the economy contracting in the first quarter, with no Brexit deal in sight and more companies set to act on contingency plans for the UK crashing out of the EU without an agreement.

However, Samuel Tombs, at the consultancy Pantheon Macroeconomics, said the MPC had already “had its fingers burnt” by attaching too much weight to PMI weakness in the past.

Purchasing managers’ indices are often a good guide to the trajectory of the UK economy, but because they can rely heavily on employers’ perceptions of the business environment, they have at times overstated the impact of political uncertainty. A similar plunge in the PMIs followed the vote to leave the EU in July 2016, without resulting in any drop in output.

However, the latest surveys suggest that worries over the UK’s exit may now be starting to affect the labour market, which has until now remained remarkably strong, despite a drop-off in business investment.

The latest official data — for the three months to November — showed employment at a record high and unemployment at its lowest level since 1975. The surveys suggested that in the all-important service sector — which accounts for the bulk of UK jobs and output — companies were still raising salaries, but were becoming more cautious about recruitment, with the first drop in employment for more than six years. Employment flatlined in the construction sector and fell outright in manufacturing.

“Worries about future demand now appear to be seeping into hiring decisions,” said Thomas Pugh, at the consultancy Capital Economics, who noted that UK activity looked no weaker than that of the eurozone.

“For so long everything seemed to justify tightening except earnings growth — the dog that didn’t bark — and now wages are the only thing barking,” said economists at Bank of America Merrill Lynch, who argued that since wage growth was a lagging indicator, it might no longer be necessary to raise interest rates to stop the economy overheating. “The Bank of England has time to wait in our view.”

Orignal Source