Brexit Uncertainty Drags U.K. Economy to Near Stagnation

The Brexit Debate: What Happens if the U.K. Leaves the EU
  • Services activity gauge falls to lowest level in over 3 years
  • Combined surveys suggest economy barely grew in April

U.K. companies are feeling the strain from the upcoming European Union referendum, with a gauge of services falling to its lowest level in more than three years in April.

Markit Economics said its services Purchasing Managers Index dropped to 52.3 from 53.7. While that’s above the 50 level that divides expansion from contraction, it’s the weakest since February 2013 and below the 53.5 median forecast of economists.

The slump follows bigger-than-expected declines in Markit’s manufacturing and construction surveys earlier this week. The reports indicate growth of just 0.1 percent in April, down from 0.4 percent in the first quarter.

Bank of England officials have said they will interpret economic data around the referendum with caution. The nine-member Monetary Policy Committee will announce its next interest-rate decision and publish new forecasts on May 12.

“The MPC told us that it’s going to be less sensitive than normal to the data amid all this Brexit uncertainty, but if you do get growth this quarter of 0.2 percent or lower, it’s going to test the patience of the doves on the committee,” said Alan Clarke, an economist at Scotiabank in London. “It’s looked through temporary distortion in the past. I don’t think they’ll cut rates, it’s just questionable whether you’ll get a dissent or two.”

Holding Back

The pound was trading at $1.4450 as of 11:50 a.m. London time, down 0.3 percent from a day earlier.

The BOE has already said the buildup to the June 23 vote is weighing on confidence and investment, and warned the impact could be more severe if the U.K. votes to leave the bloc in a so-called Brexit. Markit’s composite PMI fell to the lowest in more than three years last month.

“Uncertainty about the EU referendum caused customers to hold back on purchases, exacerbating already-weak demand,” said Chris Williamson, chief economist at Markit in London. “The deterioration in April pushes the surveys into territory which has in the past seen the BOE start to worry about the need to revive growth.”

Some services companies said clients delayed new contracts because of the forthcoming referendum, according to Markit. Employment growth slowed in April and the outlook for activity was at its joint-weakest level in over three years, it said.

In a separate report Thursday, Moody’s said that uncertainty over the referendum had pushed up funding costs for British lenders this year and warned that global investment banks could “progressively downsize their U.K. activities” if Britain quits the EU.

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