UK economy may be heading for a slowdown

London - The UK may be heading for its weakest growth in a year, possibly heralding the start of a Brexit-induced slowdown.

IHS Markit’s gauges for manufacturing and the dominant services sector fell in February, with both readings coming in below economists’ median forecasts. While the construction index rose, that wasn’t enough to stop the composite Purchasing Managers Index falling to a six-month low of 53.8 from 55.5.

Markit’s combined surveys point to economic growth of 0.4% this quarter, which would be the slowest pace in a year and down from 0.7% in the previous three months.

The pound fell after the publication of the latest PMI on Friday, and was down 0.3% to $1.2226 as of 12:21. That’s the lowest since Prime Minister Theresa May delivered the speech in mid-January on her vision for the UK after it leaves the European Union.

“The buoyancy of recent UK growth numbers may be going away,” said Alan Clarke, an economist at Scotiabank in London. “To be fair, a composite reading of almost 54.0 is still very respectable; but we just aren’t booming anymore.”

The loss of momentum in services, the main driver of better-than-expected growth since the Brexit vote in June, is a major challenge. The economy is already forecast to weaken this year as the weaker pound pushes up prices, squeezing consumer incomes. The median prediction in Bloomberg’s monthly survey is for expansion to cool to 1.5% this year from 1.8% in 2016.

The services report also showed that sterling’s 18% drop since the referendum is continuing to feed through. Companies’ input costs and prices charged both rose at the quickest pace in more than eight years in February.

Cost surge

“The ongoing steep upturn in costs suggests that consumer-price inflation has significantly further to rise,” said Chris Williamson, chief business economist at Markit. He added that household budgets may be “starting to crack under the strain of higher prices and weak wage growth.”

While survey respondents noted that rising business costs had the potential to constrain growth, optimism remained near its post-referendum high recorded at the start of the year. That was partly on “hopes” that Brexit-related uncertainty would have little impact on demand in the near term, Markit said.

According to Williamson, the latest PMI results are back toward levels more indicative of additional Bank of England stimulus. “Policy makers are therefore likely to continue to stress the need to look through any further upturn in inflation,” he said. The BOE announces its next policy decision on March 16.

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