UK economy held back as services weaken, consumers struggle

IHS Markit said its latest round of industry surveys suggest growth of about 0.3 percent this quarter, matching the pace of the previous three months. It published the forecast after its gauge of services, the biggest part of the economy, indicated the slowest expansion in almost a year in August. The index drop was bigger than economists had forecast.

The services slowdown was most evident in consumer–facing sectors such as hotels and restaurants. Household spending has weakened this year as inflation outpaces wage growth and concerns about the economic outlook damp shoppers’ enthusiasm. Other reports on Tuesday reinforced that picture, with Barclaycard say that spending growth slowed in August, while the automobile industry reported a fifth drop in car sales.

IHS Markit’s Purchasing Managers’ Index for services fell to 53.2 — the lowest since September 2016 — from 53.8. Its other industry reports showed manufacturing strengthened in August, while construction growth slowed. Chief Economist Chris Williamson warned the decision to leave the European Union is weighing on optimism and momentum in the economy is “gradually being lost.”

The services survey also showed that a measure of new business weakened, with respondents citing “fragile” confidence.

It’s “more evidence that the hit to real incomes from sterling’s depreciation and heightened uncertainty about the economic outlook — both attributable to Brexit — are holding the economy back,” said Samuel Tombs at Pantheon Macroeconomics.

According to Barclaycard, spending on essentials increased at its weakest pace in 12 months in August and almost half of those surveyed said they are “feeling the squeeze” from faster inflation. Forty-three percent reported that they are changing their everyday spending habits in response to sustained higher prices.

That’s all weighing on retailers, whose shares are trailing the broader U.K. stock market. The FTSE 350 General Retailers Index has fallen 5.6 percent this year, while the FTSE 350 has gained by almost the same percentage.

Cost pressures intensified, due to wages, fuel bills and imported-goods prices, and some there was some concern that the pound’s recent drop against the euro could worsen the situation. Companies’ charges also increased, though subdued demand limited scope to pass on higher expenses. Sterling has fallen for four straight months against the single currency and is down more than 7 percent this year.