U.K. Services Pickup Fails to Keep Economy Far From Stagnation

(Bloomberg) -- Britain’s dominant services industry expanded more than forecast in May, a survey showed, though that wasn’t enough to lift the overall economy out of stagnation.

A Purchasing Managers Index for services increased to 51 in May, above the 50-mark that indicates expansion and a better reading than the 50.5 that economists expected. But other surveys this week showed contractions in construction and manufacturing, and retail sales in a slump.

Taken together, the surveys show that the economy remains “close to stagnation,” Markit said, while Bloomberg Economics sees a small GDP increase. That would mark a sharp slowdown from the 0.5% recorded in the first quarter, when there was a boost from Brexit stockpiling and consumer spending.

What Bloomberg’s Economists Say...

Taken at face value, it suggests the economy will fail to grow in 2Q. We’re more optimistic and expect output to rise modestly. Still, gains are likely to remain below trend over the course of this year as the economy remains in Brexit limbo and the global economy stutters.

--Dan Hanson, economist
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According to Markit’s survey, some companies noted that Brexit-related uncertainty “contributed to subdued business and consumer spending.”

Companies are putting projects on hold amid a lack of clarity about how the U.K. will leave the European Union, and the hit to confidence has started to impact consumers and retail sales. The figures paint a gloomy picture of the economy that will be inherited by Britain’s next prime minister. Incumbent Theresa May is due to step down and the Conservatives will choose a new leader by late July.

“Many businesses remain cautious in relation to spending and investing in the uncertain political environment, which is exacerbating the impact of the wider global economic slowdown on the U.K.,” Williamson said.

Key Insights

• Optimism about the year ahead picked up to an eight-month high, partly reflecting the delay of Brexit until Oct. 31
• New work rose for the first time in five months, though the rate of expansion was “only marginal”Business from abroad increased for the first time in nine months, with service providers highlighting greater exports to emerging markets
• Still, there was a decline in sales to clients in Europe and an index of new export business was below average

--With assistance from Harumi Ichikura.

To contact the reporter on this story: Jill Ward in London at jward98@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Andrew Atkinson

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