UK economy suffers slowdown in 2018

LONDON: 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 percent in the first quarter, down from 0.5 percent in the last three months of 2017.
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 (PMI). 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, yesterday’s report suggested the country grew last month at its slowest pace since just after the 2016 referendum vote to leave the EU. “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 percent – 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. Yesterday’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.

Meanwhile, sterling extended losses yesterday to hit fresh one-week lows as new surveys indicating a slowing British economy and negative news around Brexit negotiations sapped investor confidence in a busy week for the central bank. Financial data firm IHS Markit said yesterday growth in the world’s sixth-biggest economy looked set to slow to 0.3 percent in the first quarter, down from 0.5 percent in the last three months of 2017.

Sterling’s losses were also exacerbated by the general undertone of risk aversion in the markets with most European stocks down by more than a percent as investors unwound risky bets.

“We are starting to see some pressure on carry trades: US high yield bonds, interest rates flattener strategies, long emerging market trades and generally leveraged long carry bets,” said Alberto Gallo, head of macro strategies at London-based fund Algebris.

Sterling deepened losses on the day and was down 0.7 percent at $1.4014, is lowest since Jan. 30. On a two-day rolling basis, it has fallen 1.7 percent, its biggest drop since early June, 2017.

Britain has ruled out any form of customs union with the European Union after Brexit, according to a source in Prime Minister Theresa May’s Downing Street office. With those brewing tensions in the background, British and European Union negotiators this week hold their first formal Brexit talks since the interim deal in December unlocked discussions on their future relationship.

Ratings agency S&P Global said that disorderly Brexit would bring renewed downward pressure to the country’s sovereign rating. Still, investors were wary of chasing the currency lower before a policy decision later this week where a repricing of Bank of England interest rate hike expectations – several banks are now calling for a rise to come in May, and for another to come later in the year – may be on the cards. – Agencies

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