The U.K. economy made a mixed start to the third quarter and a major business group said companies weren’t seeing much benefit from the weaker pound.
Manufacturing rose in July for the first time this year, boosted by a strong rebound in car production, and the trade deficit was little changed from a downwardly revised June. But construction shrank for a fourth month after a plunge in new orders in the second quarter.
The figures may do little to dispel the picture of an economy stuck in the slow lane as Brexit uncertainty and the squeeze from rising prices take their toll. Growth in the first half was the weakest since 2012, and the British Chambers of Commerce downgraded its medium-term outlook on Friday, citing a weaker-than-expected contribution from trade and subdued consumer spending.
While sterling’s plunge following the U.K.’s vote to leave the European Union last year helped cushion some of the initial impact of the decision, there is scant evidence it is leading to a sustained re-balancing. At the same time, the decline is pushing up prices for consumers, reducing their spending power and threatening one the key drivers of expansion.
“It is increasingly clear that the post-EU referendum slide in the value of sterling has done more harm than good,” said Suren Thiru, head of economics at the BCC.
Manufacturing rose 0.5 percent in July, more than economists predicted. Vehicle output, which had fallen sharply in recent months, surged almost 14 percent, the most since March 2009, helped by new models rolling off production lines. Total industrial production rose 0.2 percent, held back by a drop in oil and gas production.
The deficit in goods and services was little changed at 2.9 billion pounds ($3.8 billion) as both exports and imports fell 0.2 percent. The shortfall for June was revised down sharply, meaning the second-quarter deficit was 1.2 billion pounds smaller than previously reported. It suggests net trade made a modest contribution to GDP during the period.
Key to the U.K.’s outlook is the dominant services industry, and surveys suggest it’s continuing to lose momentum.
At Bloomberg Intelligence, economists Dan Hanson and Jamie Murray expect industry to “fare better in the second half as the combination of more buoyant external demand and the depreciation of sterling allow manufacturing to find its feet.” But it “remains unlikely the sector will be able to offset continued weak growth in services,” they said in a note on Friday.
The BCC’s downgrade to its net trade contribution estimate is mainly based on stronger imports, with few signs customers are switching away from goods brought in from overseas despite their rising costs. Core import volumes rose an annual 7.2 percent in the latest three months, just behind an 8.9 percent increase in exports.
“A cheaper currency does not automatically mean an export boom, no matter how some politicians and commentators will it to happen,” said Adam Marshall, Director General of the BCC. “The rising upfront cost of doing business in the U.K., the uncertainty around Brexit, and the constraints created by skills gaps and shoddy infrastructure collectively outweigh any benefit arising from the recent depreciation of sterling.”
While the BCC slightly increased its 2017 growth estimate to 1.6 percent from 1.5 percent, the forecasts for 2018 and 2019 were both cut by 0.1 percentage point to 1.2 percent and 1.4 percent respectively.