UK Economy Warms up After Winter Slump, Brexit Worries Remain

June 5, 2018 6:17 am Last Updated: June 5, 2018 6:17 am

LONDON—Britain’s economy looks to have picked up speed after a winter slump, data showed on Tuesday, giving the Bank of England some of the reassurance it needs to get back to its plan to raise interest rates.

British services firms grew more quickly than expected in May although the approach of Brexit held back many companies.

The IHS Markit/CIPS services purchasing managers’ index (PMI) hit a three-month high of 54.0 in May, above a median forecast of 53.0 in a Reuters poll of economists and up from 52.8 in April.

Markit’s chief business economist, Chris Williamson, said the recovery made it more likely the BoE—which wants to be sure the slowdown in a wintry start to 2018 was temporary—would raise rates for only the second time in over a decade.

“But with the forward-looking indicators suggesting that the economy could relapse, a rate rise is by no means assured,” he said in a statement.

BoE rate-setter Silvana Tenreyro said on Monday much of the weakness in Britain’s economy in early 2018 would probably prove temporary, but the timing of when rates would next go up remained an open question.

Sterling was heading for its biggest daily gain against the U.S. dollar in seven weeks as the PMI revived bets on a BoE rate hike in August, when it updates its economic forecasts. [GBP/]

Adding to the recovery signs, separate data showed shoppers ramped up spending in May including on cars.

Britain’s economy looked set to grow by 0.3 or 0.4 percent in the April-June period, a jump from quarterly growth of just 0.1 percent in the first three months of 2018, Markit said.

However, some of the improvement was due to companies catching up on work after heavy snow in early 2018. New business grew at one of the weakest rates seen since shortly after voters decided to leave the European Union nearly two years ago.

Business confidence moderated for the third time in the past four months and job creation was the second weakest since March of last year, hampered by a lack of skilled candidates for jobs.

Britain went from being the fastest Group of Seven economy to the slowest last year as the Brexit vote pushed up inflation and made companies wary about investment.

Samuel Tombs, an economist with Pantheon Macroeconomics, said the economy would suffer if tensions between London and Brussels rise later this year when a deal for Britain’s future relationship with the EU is due to be hammered out.

“If the Monetary Policy Committee forgoes the opportunity to raise interest rates in August, the activity data – plus a Brexit showdown in the autumn – likely will mean that the next hike is put on hold until next year,” he said.

Markit said services firms faced a sharp rise in costs due to higher fuel prices and rising salaries but they increased their own prices at the weakest pace since June 2017.