Friday 29 July 2016

Post-Brexit Uncertainties Rattle U.K. Businesses, But Minimal Effect on European Counterparts

In World Economy News 29/07/2016

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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. However, 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.
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.
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.

Source: Dow Jones