Post-Brexit Uncertainties Rattle U.K. Businesses, But Minimal Effect on European Counterparts -- 2nd Update
July 28 2016 - 11:01AM
Dow Jones News
By Paul Hannon
U.K. businesses and consumers became much less upbeat about
their prospects in the weeks following the June vote to leave the
European Union, in contrast with their counterparts in the rest of
the bloc, who were untroubled by the decision.
If sustained, the decline in confidence recorded by the European
Commission's monthly survey could weaken U.K. economic growth over
coming months, since less optimistic businesses and households may
be less inclined to raise their spending.
But the resilience of confidence in the eurozone should be
positive news for the U.K., since it indicates that demand for the
country's exports should hold up, and may even be boosted by a
weaker pound.
The commission on Thursday said its economic sentiment indicator
for the eurozone--which aggregates measures of consumer and
business confidence--rose to 104.6 in July from 104.4 in June. That
was a surprise, since economists surveyed by The Wall Street
Journal last week had expected to see a drop to 103.5 in response
to the Brexit vote. It remained well above its average going back
to 1990 of 100.0, indicating relative optimism among businesses and
consumers.
However, the ESI for the U.K. fell sharply to 102.6 from 107.0
in June, reaching its lowest level since June 2013. But it remained
above the 100.0 level, which indicates businesses and consumers
remain relatively optimistic about their prospects, and even
further above the lows reached in the wake of the global financial
crisis, when it troughed at 64.3 in March 2009.
The surveys were conducted in the early weeks of July, during a
period in which political uncertainty was heightened in the U.K. as
a new prime minister was being chosen by the ruling Conservative
party, and she, in turn, was choosing members of a new government,
including those who will conduct negotiations on a new relationship
with the EU.
As that uncertainty abates, confidence may be boosted over
coming months.
The commission confirmed the sharp fall in consumer confidence
in the wake of the Brexit vote first noted by market researchers
GfK U.K. Ltd, which conducts U.K. research on the Commission's
behalf. Sentiment also soured among manufacturing companies,
service providers, retailers and construction companies.
The confidence survey is in line with other measures of Brexit's
immediate impact on the U.K. and eurozone economies. A measure of
activity based on questioning of purchasing managers at
manufacturers and services companies found the U.K. economy likely
contracted in July as businesses responded to the uncertainty
created by the Brexit vote by cutting output and payrolls, while
the eurozone economy continued to grow as businesses added to their
payrolls at the fastest pace in more than five years.
"The ESI largely rounds off the round of surveys conducted
immediately in the wake of the Brexit vote in the UK," said Cathal
Kennedy, an economist at RBC Capital Markets. "Taken together, they
suggest that the immediate impact of the UK vote has been muted,
and the hit to 2016 growth may be limited."
In a further sign that the eurozone economy has been little
affected by the Brexit vote, Germany's labor agency on Thursday
said the number of people without jobs fell by 7,000 in July, a
larger drop than economists had expected.
"The labor market has developed well in July," said Frank-Jürgen
Weise, the head of the labor agency.
To be sure, some eurozone members have closer economic ties to
the U.K. than others, and none are closer than Ireland's. In its
annual review of the Irish economy and in response to the Brexit
vote, the International Monetary Fund lowered its growth forecasts
for coming years, and now sees an expansion of 3.2% in 2017,
against its previous projection of 3.6%.
"It is likely that Ireland will face headwinds, the intensity of
which are difficult to gauge," said Zuzana Murgasova, head of the
fund's Ireland team.
Figures released on Wednesday showed U. K. growth accelerated in
the second quarter, a sign the economy remained resilient in the
run-up to the June referendum. Comparable figures for the eurozone
will be released Friday, and economists expect that they will
record a slowdown during the second quarter, albeit from a
relatively strong first three months of the year.
ECB President Mario Draghi last week signaled that policy makers
are open to providing additional stimulus should the U.K. vote
appear likely to throw its efforts to boost inflation off course,
but said it was too early to judge whether that would be the
case.
The resilience of business confidence in the wake of the vote
reduces the likelihood that policy makers will conclude more
stimulus is needed when they next meet in September.
There are also signs that the eurozone's annual rate of
inflation may have edged higher in July, with Germany's statistics
agency reporting on Thursday that consumer prices were 0.4% higher
than a year earlier, having been just 0.2% higher in June. Eurozone
inflation will, however, remain well below the central bank's
target of just under 2.0%, as it has been for more than two
years.
Todd Buell and Emese Bartha in Frankfurt contributed to this
article.
Write to Paul Hannon at paul.hannon@wsj.com
(END) Dow Jones Newswires
July 28, 2016 10:46 ET (14:46 GMT)
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