BUSI­NESS UK fi­nance min­is­ter meets G20 coun­ter­parts to boost mar­ket con­fi­dence

Weekend Argus (Saturday Edition) - - LIFE -

LON­DON: Bri­tain’s econ­omy is shrink­ing, the broad­est sur­vey of busi­ness con­fi­dence since last month’s his­toric vote to quit the EU showed, lead­ing fi­nance min­is­ter Philip Ham­mond to pledge a loos­en­ing of purse strings if the weak­ness en­dures.

The Bank of Eng­land has also been clear that eas­ing mon­e­tary pol­icy may be nec­es­sary.

The flash, or pre­lim­i­nary, Markit sur­vey of pur­chas­ing man­agers fell by the most in its 20-year his­tory. It was con­sis­tent with an econ­omy con­tract- ing 0.4 per­cent in the third quar­ter, con­trast­ing with an ac­tual read­ing of plus 0.4 per­cent in the first quar­ter.

Yes­ter­day’s read­out, lit­tle more than a week after Prime Min­is­ter Theresa May formed a new Con­ser­va­tive gov­ern­ment, in­di­cates the chal­lenge she faces to main­tain mar­ket and in­vestor con­fi­dence as she em­barks on what prom­ise to be long and dif­fi­cult Brexit talks.

Ham­mond played down the pur­chas­ing man­ager sur­veys as a mea­sure of sen­ti­ment, not of “hard ac­tiv­ity”, but also said he would act to sup­port the econ­omy when he an­nounces his bud­get plans later in the year.

Ham­mond is at­tend­ing a week­end meet­ing of fi­nance min­is­ters from the Group of 20 economies at which coun­ter­parts will be keen to hear how Bri­tain can pull off a smooth exit from the EU while min­imis­ing the dam­age to the global econ­omy.

The Markit PMIs, which give an early in­di­ca­tion of how gross do­mes­tic prod­uct is likely to per­form, sug­gest the £1.8 tril­lion UK econ­omy is shrink­ing faster than at any time since the af­ter­math of the global fi­nan­cial cri­sis.

A ma­jor con­cern among busi­nesses is the ac­cess Bri­tain will have to the EU’s sin­gle mar­ket after leav­ing. Bri­tain in­sists it wants to limit free­dom of move­ment of work­ers; the EU says such free­dom is a con­di­tion of the sin­gle mar­ket.

The PMI for the ser­vices sec­tor fell to 47.4 in July from 52.3 in June, the steep­est drop since records be­gan in 1996 and the worst read­ing since March 2009, around the low point of the global eco­nomic re­ces­sion. Econ­o­mists polled ex­pected a much smaller fall to 49.2.

The ev­i­dence of a sharp drop in busi­ness ac­tiv­ity across a broad swathe of Bri­tain’s econ­omy may alarm the Bank of Eng­land, which is try­ing to de­cide how ag­gres­sively to act at its Au­gust pol­icy meet­ing to cush­ion the shock of the ref­er­en­dum vote.

Ster­ling’s post-ref­er­en­dum plunge to its low­est level against the dol­lar since the mid-1980s has helped man­u­fac­tur­ing ex­ports ex­pand at the fastest pace in al­most two years, Markit said. But the pound’s fall also pushed up costs for en­ergy and raw ma­te­rial at the fastest pace in five years.

“This is the first ma­jor sur­vey show­ing the pace of ac­tiv­ity through the econ­omy and it is soft,” In­vestec an­a­lyst Philip Shaw said.

Econ­o­mists said the “re­set” Ham­mond had in mind may re­sem­ble the fis­cal rule adopted by his Os­borne in 2010 when he aimed to bal­ance the pub­lic fi­nances within five years, ex­clud­ing in­vest­ment spend­ing and tak­ing into ac­count where Bri­tain was within the eco­nomic cy­cle.

“He could both loosen fis­cal pol­icy at a time when the econ­omy may well need it but also he could claim that he wasn’t com­pletely aban­don­ing the con­ser­va­tive’s con­cern for be­ing re­spon­si­ble with the pub­lic fi­nances,” said Sam Hill, se­nior UK econ­o­mist at RBC Cap­i­tal Mar­kets.

The man­u­fac­tur­ing PMI fell to 49.1 from 52.1 in June, the low­est since Fe­bru­ary 2013. The com­pos­ite in­dex, which com­bines ser­vices and man­u­fac­tur­ing, slumped to 47.7 from 52.4, the weak­est read­ing since April 2009. – Reuters

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