U.K. economy ‘on course to rebound’ in Q2

Jun. 5, 2018 – The British economy appears to be bouncing back following a period of near-stagnation that had reinforced fears about the impact of Brexit, surveys indicated Tuesday.

Retail sales are said to have grown in May at their highest annual rate in over four years, while car sales recovered further.

And a closely monitored survey of service sector activity found growth running at a three-month high. In their monthly survey of the service sector, financial information company IHS Markit and the Chartered Institute of Procurement & Supply said their so-called purchasing managers’ index for the sector – a broad gauge of business activity – rose to 54 in May from 52.8 the previous month. Anything above 50 indicates expansion.

“The improvement in service sector activity adds to evidence that the economy is on course to rebound in the second quarter,” said Chris Williamson, IHS Markit’s chief business economist.

Williamson said that after taking into account separate surveys into manufacturing and construction, growth in the April-June period could come in at 0.4 per cent, ahead of the first quarter’s tepid rate of 0.1 per cent.

“However, disappointing inflows of new work suggest that growth could wane in coming months as Brexit-related uncertainty continues to weigh on spending decisions and dampen business confidence,” he said.

Brexit remains the biggest challenge for the British economy. Firms have been reluctant to invest without any clear idea of the country’s future relationship with the EU. Britain is due to leave the bloc in March 2019 but the lack of progress in Brexit discussions in recent months is raising fears that the country faces a “cliff-edge” departure. That could mean that firms will see tariffs slapped on their exports and trading levels heavily hit.

However, one of the early impacts of Brexit appears to be waning. After the country voted to leave the EU in June 2016, the pound collapsed, raising the cost of imported goods and consequently stoked inflation. That weighed on consumer spending. Now, though, with inflation falling and wages rising, consumer spending appears to be buoyant.

The British Retail Consortium said same-store sales spiked by 2.8 per cent in the year to May. That’s the highest increase since January 2014. Barclaycard also reported a 5.1 per cent gain in consumer spending from last year, pointing to overall increases following wage growth and falling inflation rates in the economy.

Another sign of an improving consumer backdrop came with the news that new car demand grew by 3.4 per cent in the year to May, according to the Society of Motor Manufacturers & Traders. This is the latest increase following a long run of declines that many industry experts blamed largely on the inflationary impact of the Brexit vote.

Overall, Tuesday’s figures may well stoke expectations that the Bank of England will increase interest rates again this year. It held off from raising its benchmark rate by a quarter-point to 0.75 per cent in May largely because of the slowdown in first-quarter growth, which it said was primarily due to a protracted bout of cold and snowy weather.

“As such these data releases keep the prospect of an August rate hike firmly on the table,” said James Knightley, chief international economist at ING.