A raft of data published this week will offer the latest health check on the state of the UK economy following June’s vote to leave the EU, with economists expecting the figures to suggest businesses were so far “proving resilient”.
On Monday, figures will show how confidence is holding up in the UK service sector, from the latest survey of purchasing managers. Andrew Sentance, senior economics adviser at PwC, said the update would be the most closely scrutinised of all the data due this week after activity and orders in July were found to have contracted at the fastest rate since early 2009.
“People will be looking very closely to see if there is a bounce back in confidence, as we saw in last week’s PMI survey for manufacturing, and it would not be surprising if there is,” he said.
Sentance said it was possible that the business mood in July “was affected by the shock of the vote and the political fallout”. He added: “Speaking to businesses it seems confidence has improved as they have realised that the UK economy is not falling off a cliff.”
Howard Archer, chief UK economist at IHS Global Insight, said he expected the industry survey to show “modest expansion” in August. “Both the manufacturing (especially) and construction (to a limited extent) surveys have shown activity picking up in August after marked weakness in July, and we suspect that this will be the case for the services sector as well,” he said.
Although he added that there were likely to be falls in activity in sectors involving commercial property and house sales, which have both taken a hit since the vote to leave.
Archer was generally upbeat about this week’s slew of data, some of which is covering the post-referendum period for the first time. “There is likely to be further evidence that the economy is proving resilient so far following June’s Brexit vote,” he said.
Sentance said unless there was anything shocking in this week’s figures “it would reinforce the view that the economy might not grow that quickly in the short term but will hold up reasonably well in the final quarter”.
Consumer spending appears not to have taken a knock, with shoppers who are spending getting more for their money. Morrisons launched a new grocery price war at the weekend, and food prices have been tumbling. The latest index from the British Retail Consortium (BRC) and industry analysts Nielsen showed a 1.1% fall in prices in August, following a 0.8% drop in July.
Meanwhile the cost of non-food items fell by 2.5% over the month, compared with a 2.2% drop in July. The report said a combination of promotional activity by retailers, softening oil prices and a global glut of wheat had all pushed down prices.
When the BRC releases a separate report on retail sales on Tuesday, Archer said he expected the numbers to be healthy, with low prices and rising pay supporting consumer spending. The CBI has already published data covering the first half of the month, which showed a summer bounce in sales, while the Office for National Statistics reported a 1.4% increase in July.
“Retail sales appear to have been helped in August, as they were in July, by good weather lifting demand for clothing,” said Archer, adding that they may also have been boosted by the feelgood factor of Team GB’s Olympics success, and by visiting tourists exploiting the weakness of the pound to splash out on luxury goods. However, Archer warned that consumer purchasing power could wane as companies look to limit pay increases and inflation rises.
Helen Dickinson, chief executive of the BRC, said that prices could start to rise given the devaluation of sterling following the referendum result. “But that’s likely to take several months to properly feed through, given that retailers won’t feel the brunt of the cost increases until existing contracts with foreign suppliers come to an end,” she said.
“Even then, retailers will have to make a decision about when and how much to pass onto consumers. Given the strength of competition in the market, and if the economy softens in line with predictions, any pass through may be more limited than implied by the exchange rate movement.”
Official figures on manufacturing and construction due out this week are for July, and only cover the very early days after the referendum. Archer said he expected the ONS data on manufacturing output to show a 0.7% fall month-on-month, with some work having been postponed or cancelled as a result of uncertainty in the immediate aftermath of the vote. Sentance said he would be looking at the figures for capital goods as an early indicator of whether businesses were still investing. However, he said it was very early to reach conclusions on the impact of Brexit. This was echoed by the manufacturing employers group EEF, which said its members were seeing “a mixed picture” so far.
Its latest manufacturing outlook survey, produced with accountants BDO, showed that in the third quarter of the year activity levels remained largely unchanged but that confidence in the overall UK economy had taken a knock. Mechanical equipment suffered a big decline but export orders had exceeded expectations, particularly for electronics and electrical equipment. And while recruitment of new employees had fallen, EEF’s members said they did expect to take more people on in the future.
Lee Hopley, chief economist at EEF, said: “Signs of an export revival are helping to drive more optimism about activity in the second half of the year, but concerns about whether the UK economy can shrug off post-referendum challenges is clearly evident.”
She added: “These risks are expected to hit some sectors – such as industries linked to investment goods and construction – harder than others. Despite the short-term outlook for manufacturing remaining broadly stable, the continued downward slide in investment plans should keep policy makers alive to the potential risks facing the sector.”
