Great Reboot

Euro zone businesses outran British firms at start of second half

LONDON (Reuters) - Businesses across the euro zone started the second half with robust growth, outpacing British counterparts which are struggling to regain momentum as consumers keep their hands in their pockets, surveys showed.

Signaling the bloc’s positive readings could continue into August, new orders rose, backlogs of work were built up and firms increased headcount. But British services firms’ expectations for the year ahead were among the weakest since late 2012.

“We are expecting growth to be a little stronger in the second half than in the first in the UK, whereas in the euro zone we are expecting it to be a little weaker,” said Ben May at Oxford Economics.

“So they converge but there is a modest outperformance by the euro zone in the second half -- a relatively sustained period of outperformance which hasn’t been particularly common over recent years.”

IHS Markit’s final composite Purchasing Managers’ Index for the euro zone was 55.7 in July, down from June’s 56.3 and a flash estimate of 55.8. It has been above the 50 mark that divides growth from contraction since mid-2013.

The British version only nudged up to 54.1 from 53.8.

The latest PMI figures suggest the euro zone economy will grow 0.6 percent this quarter, IHS Markit said, whereas Britain is set for 0.3 percent growth. A Reuters poll last month had 0.4 and 0.3 percent forecasts respectively.

Tourists look at Eiffel Tower keychains displayed in a souvenir shop in Paris, France August 2, 2017. REUTERS/Christian Hartmann

Last quarter, the euro zone economy grew twice as fast as Britain’s for the second consecutive quarter.

“Typically the UK economy tends to grow much more strongly than the euro zone, so this period of outperformance by the euro zone is reasonably unusual,” May said.

The July surveys will bolster the case for the Bank of England to keep interest rates on hold later on Thursday while rising prices in the currency union could give the European Central Bank more grounds for tweaking its monetary policy in the autumn.

Improving economic growth in Europe and hints from ECB policymakers have helped shape expectations for a shift, probably in the form of an announcement it will taper its asset purchases, even though the inflation outlook doesn’t point to a need for a change just yet.

In September, the ECB is expected to announce a move away from its ultra-easy policy, according to a Reuters poll.

By contrast, only two of the 80 economists polled by Reuters last month expect the BoE to tighten policy later on Thursday and medians in the survey suggest Bank Rate will be left at its record low 0.25 percent until 2019.

“The (UK) services PMI remains consistent with sub-par growth, despite its modest improvement in July, suggesting that the economy still isn’t strong enough to warrant higher interest rates,” said Samuel Tombs at Pantheon Macroeconomics.

Britons voted just over a year ago to leave the European Union and since then workers’ pay increases have fallen further behind inflation, compelling shoppers to hold back on purchases.

Spending played a large part in Britain’s economic growth last year and although a big fall in sterling since the Brexit vote has benefited manufacturing exporters, consumers have been hit by a bounce in prices of imported goods and services.

“According to IHS Markit, firms continue to cite Brexit uncertainty and the household spending squeeze as dampening factors when it comes to new orders and demand for their services,” said James Smith at ING.

Additional reporting by David Milliken; Editing by Catherine Evans