UK service sector surge highlights strong economic momentum - ING

According to the James Knightley, Senior Economist at ING, business surveys suggest the UK economy had a strong end to the year however, Brexit worries are set to intensify and the squeeze on household spending power will weaken growth in 2017.

Key Quotes

“The UK’s service sector purchasing managers’ index has, like the manufacturing and construction surveys, jumped more than expected in December. The headline index rose to 56.2 from 55.3 - well ahead of the consensus 54.7 expectation. This is the strongest figure since July 2015 and like those other surveys, indicates that the UK economy has strong momentum heading into 2017. Indeed, the composite index, which combines all of the sector PMIs, has risen to 56.7 from 55.3 with the survey compiler suggesting that this has historically been consistent with GDP growth of 0.5%QoQ.”

“This is clearly a very positive story, but we do worry that sentiment surveys have weakened and the situation is likely to deteriorate further as household incomes are squeezed by rising inflation. Furthermore, with Article 50 set to be triggered in the next three months the Brexit process will soon start in earnest and the uncertainty that this generates may see businesses choose to sit on their hands rather than look to expand and invest and hire new workers. Consequently, while the BoE is neutral on the outlook for monetary policy we still feel that further stimulus is more likely that interest rate hikes over the next 18 months.”