Outlook for UK economy clouds over in second half of 2017

LONDON (Reuters) - Britain’s economy is likely to lose momentum in the second half of 2017, according to a closely watched survey that could disappoint some Bank of England officials who want to raise interest rates for the first time in a decade.

Workers walk in the rain at the Canary Wharf business district in London, Britain November 11, 2013. REUTERS/Eddie Keogh/File Photo

Sterling dipped after Wednesday’s Markit/CIPS survey showed growth across British services companies fell to a four-month low in June.

Although the survey suggested the economy recovered some speed in the second quarter and probably expanded at a quarterly pace of around 0.4 percent, double the pace of the weak first quarter, there were some ominous signals in the PMI’s forward-looking gauges.

Business expectations sank to their weakest level since last July’s dip after the vote to leave the European Union, and it was not far off lows last reached in late 2011. Growth in new orders hit a nine-month low.

The headline index edged down to a four-month low of 53.4 in June from 53.8 in May, just shy of a forecast for 53.5 in a Reuters poll of economists.

On Tuesday BoE rate-setter Michael Saunders said he was “reasonably confident” that lower consumer spending will be offset by higher exports and investment, justifying his vote to raise interest rates from a record low 0.25 percent.

“But the latest PMI survey pours some cold water on that hypothesis,” said JPMorgan economist Allan Monks.

“Indeed, it is worth highlighting that the weakness in the UK PMI comes at a time when the broader European PMIs have strengthened considerably.”

The mood among services firms was probably hit by uncertainty after June’s election, in which Prime Minister Theresa May gambled away her parliamentary majority, and by Brexit talks, as well as the economic outlook, IHS Markit said.

A third monthly drop in car sales in June -- albeit from recent record highs -- underlined the slowdown among consumers.

Separate official data showed productivity, arguably Britain’s biggest economic problem over the last decade, fell in the first three months of the year -- the first decline since late 2015.

The latest productivity data further complicates the outlook for BoE policymakers. Although weak productivity reduces the scope for future wage growth, it goes hand-in-hand with higher inflation.

“Unless more is done to tackle the nation’s low productivity, people’s wages and living standards will continue to fall and the UK will be ill-equipped to compete once we do leave the EU,” said Ian Brinkley, acting chief economist at the Chartered Institute of Personnel and Development.

Editing by Catherine Evans