UK economic doubts grow stronger as manufacturers struggle


New doubts have emerged over the UK’s economic outlook after new evidence that growth is reliant on household spending while manufacturers struggle with a strong pound and the fallout from a downturn in China, reports The Guardian.

UK economic growth is expected to hold up during the second half of this year but a sharp drop in business confidence in recent weeks suggests the momentum is under threat, according to a round-up of indicators from accountants BDO.

Its latest output index for the UK edged up this month, with the main impetus for growth coming from strong consumer spending thanks to rising wages and near-zero inflation. But confidence among businesses fell for the fifth straight month, according to BDO, which produces its optimism index by combining findings from Bank of England regional agents, CBI surveys and the Markit/CIPS purchasing managers reports (PMIs).

“While the expected continued economic growth is encouraging, falling business confidence suggests the UK economy is approaching a turning point,” said BDO partner Peter Hemington.

“The UK cannot rely on consumer spending and services in the long-term. Policymakers must focus on steps to rebalance the economy and give support to manufacturers and greater wealth creation in the north and Midlands.”

Manufacturers were particularly downbeat, recording their lowest level of confidence since November 2012, BDO said. Their mood echoes official figures last week showing sharp falls in exports and manufacturing output and a gloomy outlook from the manufacturers’ organisation EEF, which bemoaned a hit to business from China’s slowdown.

The Bank of England warned last week that the turmoil on Chinese markets which spread around the world in recent weeks had “the potential to add to the global headwinds to UK growth and inflation”.

However, a Bank policymaker said over the weekend that interest rates need to rise “relatively soon” as wages pick up.

Martin Weale also said a rise would give the central bank scope to cut if the British economy runs into trouble in the future.

“With wage growth remaining firm, the tightening labour market means that inflation is likely to rise above target in two to three years’ time,” Weale wrote in an article for the Scotland on Sunday newspaper.

Interest rates must rise ‘relatively soon’, says Bank of England’s Martin Weale

“Policy needs to be set with reference to this, rather than the current rate of inflation. As a result, it seems likely to me that the Bank rate will need to rise relatively soon.”

The Bank’s governor, Mark Carney, had recently warned homeowners to prepare for a rate rise, perhaps as soon as the turn of the year. But recent economic indicators and turmoil on global markets have pushed back City expectations on the timing of the first rate rise since the financial crisis.

This week, all eyes will be on the US central bank’s latest policy meeting, when some economists expect it to raise interest rates from their near-zero level. So-called “lift-off” from the US Federal Reserve had been hinted at by policymakers as the world’s biggest economy appeared to gain momentum in recent months. But the turmoil in China and throughout global markets has cast doubt on the Fed now moving this week.

“While a first rate hike still cannot be ruled out, we expect lift-off to be postponed to the fourth quarter,” said economists at Daiwa Capital Markets.

Philip Shaw, economist at Investec also expects the Fed to hold fire for now but to send some signals to financial markets that a rise is indeed nearing.

“Whilst we expect no change in headline policy we judge that lift-off point is not far off; indeed, had it not been for the recent China-led risk aversion we would have been banking on the first rate rise arriving at the upcoming meeting,” said Shaw.

“Instead, our expectation is that the Fed is likely to seek to cautiously guide markets that it is on course to tighten policy over the next few months following further recent improvements in the labour market.”