A Slowdown in the UK Private Sector

The Confederation of British Industry (CBI) has announced that the growth of the British private sector slowed in the 3 months to September. Its survey has shown that the main reason for the slowdown is stagnation in the manufacturing sector. It is the first such case in more than 2 years. Stagnation is also visible in the construction and retail sectors. It is expected that the economic growth indicator in the third quarter will be smaller than in the second quarter of the year. CBI surveys confirm such a forecast: the monthly growth indicator fell from +31 in August to +22 in September.

The situation has also worsened in the service sector, which accounts for more than three-quarters of Britain’s income. A Markit/Cips survey shows that the purchasing managers’ index (PMI) of service activity dropped from 57.4 to 55.6 in July. It was the lowest result in the past 27 months.

Rain Newton-Smith, CBI Director of Economics, has mentioned that one of the main reasons of the economic slowdown is the strength of the pound. According to her, it has a negative effect on exports to the euro zone. The situation can become even worse if the Bank of England chooses a bad moment to increase interest rates for the first time since the financial crisis. Bad timing can strengthen the pound even more, thus further challenging British exports. There is such a risk as the Bank of England has recently announced that it is ready to gradually start raising interest rates from next February. However, many economists predict that due to the current economic situation this decision will be postponed at least until summer 2016.

The British economy has also been affected by China’s economic slowdown, particularly in the manufacturing sector. A survey of factory purchasing managers has shown that China’s official manufacturing index fell from 50.0 in July to 49.7 in August. It was the lowest position since August 2012. The results of a Caixin survey were also bad: the PMI index fell from 47.8 in July to 47.3 in August. It was the worst result in the past 6 years.

Opinions on the future of the British economy vary. Rob Dobson, Senior Economist at Markit, a provider of financial information, believes that the direct impact of the Chinese slowdown on the British economy will be minimal as “China makes up only a small proportion of UK exports”. However, he admits that there is still a chance that British businesses can be affected more indirectly: everything depends on the global economic situation.

Mark Stephenson, Manufacturing Expert at Deloitte, a consulting  firm, thinks that China’s economic slowdown will affect the British economy more severely:

“A reduction in demand from China for imported goods would affect both direct UK imports and those of the broader global manufacturing base that UK manufacturers supply. The supply chains of many UK manufacturers depend upon Chinese manufacturers and will be impacted to varying degrees.”

Capital Economics, an economic research consultancy, considers the British economic slowdown as a blip before a rise in the autumn because of falling oil prices. The price decrease has increased household budgets, and eased price pressure on businessmen. On the other hand, some economists are afraid that the recovery of the UK economy will be affected by a slow recovery of China’s economy. A Markit/Cips survey shows that British manufacturers also share the same concern: the headline manufacturing PMI fell from 51.9 in July to 51.5 in August although it was expected to reach 52.0. In addition, a survey by the manufacturers’ organization EEF reveals that 47% of British companies are worried that the economic slowdown in China will prolong.

References:  [1] Mamidipudi Soumithri, Reuters / [2] Phillip Inman, The Guardian / [3] Katie Allen, The Guardian