BUSINESS UK finance minister meets G20 counterparts to boost market confidence
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