Brexit-bound Britain’s economy continues to lag Europe

Britain’s economy is continuing to lag behind a fast-recovering euro zone as firms worry about Brexit and consumers feel the pinch of rising inflation and the weak pound, surveys showed on Tuesday.

Manufacturers are benefiting from increasing demand in Europe and beyond, but the much bigger UK services sector grew at its weakest pace in nearly a year in August, according to the IHS Markit/CIPS services Purchasing Managers’ Index.

The world’s fifth-biggest economy initially withstood the shock of the June 2016 vote to leave the European Union, which will remodel its ties with its biggest trade partners.

But growth began to slow sharply this year as inflation rose as the value of the pound fell, hitting households. The economy now looks on track to grow by 0.3 percent quarter on quarter in the July-September period, IHS Markit said.

That is the same slow rate as in the previous three months, and momentum is gradually being lost, IHS Markit said.

Based on similar surveys also published on Tuesday, growth in the euro zone is likely to be at 0.6 percent, the same as in the second quarter..

The weak outlook for growth in Britain means the Bank of England, whose policymakers meet next week, is likely to keep interest rates at a record low despite rising inflation.

Separate figures published on Tuesday showed car sales fell for a fifth month in a row. Shoppers spent more on the high street and in supermarkets, but retailers said that was caused in part by the increased cost of food.

Some economists saw Tuesday’s data as a precursor of more gloom.

“Where would growth come from at this stage in Britain? There is erosion of real income because of the inflation numbers and the uncertainty means investment will not play a role until you get some clarity on what is going on (about Brexit),” said Erik Nielsen, group chief economist at UniCredit.

But others predicted a slight pick-up because official data have looked a bit stronger than PMI surveys.

“We continue to think that growth will come in a bit stronger in the second half of this year,” Paul Hollingsworth, at Capital Economics, said. “Nonetheless, we still think that the Monetary Policy Committee will hold off until around the middle of next year, before raising interest rates.”

Sterling fell after the PMI was published but more than recovered its losses later on Tuesday.

JOB GROWTH STRONG, NEW ORDERS WEAK

The IHS Markit/CIPS services Purchasing Managers’ Index fell to 53.2 in August from 53.8 in July, a bigger drop than the median forecast of 53.5 in a Reuters poll of economists.

It was the lowest reading since September last year, shortly after the referendum vote.

Optimism among company managers edged up, but with Brexit a major concern, morale remained close to low levels that have previously indicated the economy was stalling or even contracting, IHS Markit said.

Less than two years before Britain leaves the EU, Prime Minister Theresa May’s government has yet to start substantive talks with Brussels on issues such as trade.

In one bright spot, Tuesday’s survey showed job creation was its strongest in 19 months as firms sought to work off backlogs.

But new orders grew at the second slowest pace since September of last year.

In another concern for the BoE, prices paid by services firms grew at the fastest pace in six months, potentially adding to Britain’s inflation rate which is already heading for about 3 percent, above the central bank’s 2 percent target.

“Some firms also suggested that recent exchange rate depreciation against the euro would likely drive up costs in the near term,” IHS Markit said.