Risk of ‘Brexit’ Pushes U.K. Services Firms’ Confidence to 3-Year Low

By Jill Ward | January 7, 2016

Confidence among U.K. services firms slid to a three-year low last month as the risk of Britain exiting the European Union weighed on executives’ minds.

The drop in sentiment was reported by Markit Economics in its monthly sector survey. The headline activity index fell to 55.5 from 55.9 in November, a bigger drop than economists had predicted. A gauge of firms’ expectations for activity over the forthcoming 12 months was the weakest since February 2013.

Prime Minister David Cameron’s plans for a referendum on EU membership by the end of next year is looming over the outlook for the U.K. and featured as a key concern in a survey of economists by Bloomberg last month. JPMorgan Chase & Co. warned on Wednesday that financial-services firms from banks to insurers could pull jobs out of the U.K. should Britain leave the bloc.

The services survey will be closely watched by Bank of England officials, who announce their next policy decision on Jan. 14 and will probably leave the key rate at a record-low 0.5 percent. It suggests the domestic economy, which has been the bulwark of growth, may have its own troubles as firms prepare for an increase in the minimum wage, continued fiscal austerity and the EU vote.

‘More Cautious’

“Firms are becoming more cautious in the face of growing uncertainties,” said Chris Williamson, chief economist at Markit. “The cost impact of the living wage, government spending cuts, a potential hike in interest rates, global economic growth jitters and of course ‘Brexit’ are all weighing on business minds.”

A measure of employment slowed to a five-month low and Markit said its surveys indicate the economy grew 0.5 percent in the final quarter of the year, down from the 0.6 percent it estimated last month. Still, the December services reading remains above the long-run trend — indicating solid overall growth.

The EU referendum, which Prime Minister David Cameron has hinted could be held this year, is also muddying the outlook for policy. Exit risks as well as lower oil prices and weaker-than- anticipated wage growth prompted ING Bank to say on Wednesday that it now expects BOE policy makers to refrain from increasing their key interest rate until the end of the year. It previously predicted a move in the second quarter.

“Uncertainty surrounding the EU referendum is building, with a vote looking increasingly likely to occur this year rather than next,” James Smith, an economist at ING, said in a note to clients. “The Bank of England has some room to keep policy loose until the Brexit uncertainty passes.”

–With assistance from Scott Hamilton.

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