UK business confidence has plunged to its lowest level in six years as Brexit-related angst takes its toll.
IHS Markit´s latest survey showed the net balance of UK companies expecting a rise in business activity had fallen to just +35%, a marked drop from the +52% reading registered in February.
At the same time, EY´s Item Club downgraded its forecasts for this year but struck a more optimistic tone on the medium-term outlook, claiming the chances of a softer Brexit had increased.
IHS Markit´s survey suggested the UK economy could be on the verge of a sharp slowdown with a weak +35% reading for those companies anticipating a pick-up in business activity, driven by sagging confidence in the services sector. Worryingly, the result is a big drop from the +52% recorded in February.
Since February, UK consumers have had to contend with an inconclusive general election and the resulting hung parliament, which is seen as weakening the UK government´s hand in Brexit negotiations. There has also been another pick-up in UK inflation, which at 2.9% is being blamed for eroding consumer spending power.
Chris Williamson, IHS Markit chief economist claimed UK business in general had become increasingly wary against the more uncertain backdrop, with the UK appearing at risk of lagging behind.
“The drop in confidence pushed the level of UK optimism below that seen in the eurozone for the first time in seven years, and contrasts with multi-year high levels of optimism in the United States and Japan," said Williamson.
It´s not all doom and gloom though according to EY´s Item Club. While the economy is looking fragile this year, it believes the medium-term outlook is brighter because the UK will likely go for a soft-Brexit rather than a cliff-edge lurch into the unknown.
According to EY, UK consumers will continue to be constrained by higher inflation and lacklustre wage growth in the short term. Consequently, EY downgraded its UK economic growth forecast for 2017 to 1.5% from 1.8% previously.
However, EY expects UK inflation to fall back to the Bank of England´s 2% target by the end of 2018, taking the pressure off hard-pressed consumers. It has raised its economic growth forecast for 2018 to 1.3% compared with its 1.2% earlier estimate. For 2019, the year the UK is meant to leave the EU, it sees a slightly better scenario, with an acceleration to 1.5% versus its previous forecast of 1.2%.
With the UK government appearing to have lost its mandate for a hard Brexit given the inconclusive UK election result, EY believes a softer Brexit with an improved economic outlook appears inevitable.
Peter Spencer, chief economic advisor to the EY Item Club, said: “The outlook for this year has deteriorated since our spring forecast, but a softer Brexit should improve the medium-term outlook - especially in sectors like the motor industry where investment has been held back by Brexit uncertainty.”
This year has seen a general deterioration in UK economic data. First-quarter economic growth was downgraded to just 0.2%, putting the UK at the bottom of the G7. While inflation has continued to rise on the back of the Brexit-induced devaluation in sterling, there have also been increased signs that UK consumers are coming under pressure.
First-quarter data also showed the UK´s savings ratio had plummeted to its lowest ever level as higher inflation eroded disposable incomes.