UK economy losing momentum as Brexit worries weigh – PMIs

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FILE PHOTO: British flag and European Union flags flutter outside the EU Commission headquarters in Brussels, Belgium, June 28, 2016. REUTERS/ Francois Lenoir/File Photo

LONDON, Sept 5 (Reuters) – Britain’s economy is losing momentum as worries about Brexit mount, according to a survey which showed growth in the country’s dominant services sector in August was at its weakest in nearly a year.

The IHS Markit/CIPS services Purchasing Managers’ Index fell to 53.2 in August from 53.8 in July and below 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 decision to leave the European Union.

The services slowdown is likely to add to the case for continued record low interest rates from the Bank of England whose policymakers meet next week, IHS Markit economist Chris Williamson said.

Optimism among company managers edged up but remained close to low levels that have been indicative of the economy stalling or even contracting in the past, with Brexit the main concern, he said.

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

Britain’s economy initially withstood the shock of the Brexit vote in June last year before it slowed sharply in early 2017 as rising inflation and weak wage growth ate into spending by households.

Figures published overnight showed British shoppers increased their spending last month but there was little sign yet that the squeeze on spending was easing.

By contrast, an IHS Markit survey last week showed manufacturing had a good August, helped by gathering speed in the euro zone.

A separate industry survey published overnight showed the biggest proportion of British manufacturers in at least 20 years reporting higher output and orders, despite waning confidence in the outlook at home.

However, the weaker performance in the much bigger services sector and in construction mean Britain’s economy is on track to grow by a quarterly 0.3 percent in the third quarter, the same slow rate as in the second quarter, and momentum is gradually being lost, IHS Markit said.

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.

Editing by Toby Chopra

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