With surveys showing a rebound in the services sector, is it too early to call time on UK post-Brexit strength?

Retailers See Strong Christmas Sales
PMIs have come in better than expected this week (Source: Getty)

Simon French, chief economist at Panmure Gordon, says Yes.

Since last June’s referendum, the UK economy has seen a 12 per cent depreciation in the value of the pound, a loosening of monetary policy from the Bank of England, and a slowdown in the pace of government austerity. The impact of these three changes has been to provide stimulus to the economy as it seeks momentum ahead of Brexit in 2019.

After moderate output growth of 0.3 per cent in the first quarter, all three of this week’s purchasing managers’ indices (PMIs) point to a decent start to the second quarter. Furthermore, the ongoing impact of stimulus – combined with an accelerating global economy – should support steady growth in the UK economy during the second half of 2017.

Much greater risk faces the economy when the terms of Brexit begin to crystallise. Firms and households can then establish what tariff and non-tariff barriers, if any, they will face. Despite the recent Brexit-related bickering, clarity on those barriers remains some way off.

Jack Coy, an economist at CEBR, says No.

Although a stronger than expected services PMI for April is welcome news, the wider context for the sector dampens hopes of a sustained bounce back. A deeper look into the PMI data shows firms’ optimism has actually fallen further from January’s post-Brexit peak, which can be attributed to several factors.

First, inflationary pressure on household budgets means cash-stripped consumers are visibly reining in spending, with real wage growth now in negative territory. Consequently, with rising input costs squeezing margins, consumer-focused industries like retail, accommodation and restaurants are faring poorly.

Neither of these two key obstacles – cost pressures and fading consumer demand – will disappear overnight, with inflation showing little sign of cooling and wage growth stubbornly low. While the sector may recover some of its momentum from a particularly weak first quarter, these pressures will prevail throughout 2017. Given more than three-quarters of total GDP is comprised of services, this will put the brakes on growth.

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