U.K. Factories, Consumers Knock Some Momentum From Economy

  • Cracks are appearing in economy’s post-referendum resilience
  • Data on services growth due this week also forecast to slow

U.K. manufacturing growth weakened for a second month and borrowing by consumers softened, according to reports that provide possible early signs of a economic slowdown this year.

IHS Markit said its factory index fell to 54.6 in February from a revised 55.7, above the 50 mark dividing expansion from contraction but below economists’ expectations. Consumer credit grew at its slowest annual pace in five months in January, according to the Bank of England. Reports later this week are also forecast to show weaker construction and services.

While Wednesday’s numbers, which included stronger-than-expected mortgage approvals, signal there’s continued momentum in the economy, that’s forecast to soften this year as living standards come under pressure from rising food and fuel costs. Retail-sales growth in January was the weakest in three years and surveys show consumer confidence is ebbing.

The squeeze on households from faster inflation is the result of the pound’s precipitous fall since the U.K.’s June vote to leave the European Union. The currency move has had mixed effects for manufacturing, making goods cheaper for overseas buyers while also boosting costs for producers. In a positive development, Markit said its gauge of input prices slipped in February from a record high.

“The impact of the weak sterling exchange rate on prices is starting to subside, providing welcome respite with regards to pipeline inflationary pressures,” said Rob Dobson, senior economist at Markit. 

Nevertheless, rising input costs are probably outweighing any boost to exports. “The competitiveness of U.K. exports has barely improved and domestic demand is starting to feel the strain of higher prices,” said Samuel Tombs, an economist at Pantheon Macroeconomics. “Hopes that the manufacturing sector will step up and prevent the overall slowing in response to fading momentum in the services sector look misplaced.”

Economists in a Bloomberg survey forecast overall growth to slow to 1.5 percent this year, down from 1.8 percent in 2016.

The factory report also showed that export orders rose for a ninth month in February, and the weakness of the pound helped boost demand from Europe, the U.S. and Asia. While manufacturing won’t make up for weaker U.K. domestic demand, Markit’s index indicates quarterly growth of 1.5 percent, which would be one of the best performances in seven years.

“The big question remains as to whether robust growth can be sustained or whether it will continue to wane in the coming months,” said Dobson.

With U.K. Prime Minister Theresa May planning to trigger Brexit this month, kicking off exit talks with the EU, businesses are seeking reassurance on issues such as access to markets and supply of skilled labor. Confederation of British Industry Director-General Carolyn Fairbairn said Wednesday she wants the government to sharpen its industrial strategy to ensure that it is not a “flash in the pan.”

The plan, first unveiled in January, is aimed at focusing on key sectors, supporting companies and boosting the country’s lagging productivity.

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