Are consumers spending? What to watch for in UK economic data

Service sector and other statistics promise early insight into the impact of the Brexit vote
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Since the Brexit vote politicians, businesses and policymakers have kept a sharp eye out for any clues about how the UK economy is faring. On Friday, an array of new data will be published that will provide more insight — particularly into the all-important services sector. Here are the three things to look for.

How has the services sector fared since the referendum?

The Office for National Statistics index of services for July will provide the first official estimate of the immediate hit to services output, which accounts for almost four-fifths of the UK economy. This will be more interesting than the ONS’s latest estimate of economic growth in the second quarter, which is likely to remain unchanged at 0.6 per cent.

A purchasing managers’ index for the same period of July suggested the services sector contracted sharply before recovering in August. Such extreme volatility is not expected in the official data, however, since surveys such as the PMI can overreact to unexpected news.

Economists believe the ONS statistics will show that the sector as a whole grew by 0.1 per cent in July, although the figure will be open to subsequent revisions.

Are consumers still spending?

Consumer confidence plunged after the referendum, according to the headline survey by GfK, but rebounded in August. On Friday, GfK will publish figures for consumer confidence in September.

Forecasters expect these to show a further recovery, with the index expected to rise from minus 7 in August to minus 5 in September. If the series lifts to this level, it will still be below the pre-referendum level of minus 1 but above the long-term average of minus 9.

Such an outcome is likely, says Howard Archer, an economist at IHS Markit, because concerns over the economy’s recent performance have been allayed by evidence that consumer confidence has “proved resilient following the Brexit vote”.

How reliant is the UK on the ‘kindness of strangers’?

The UK’s current account deficit may be forever associated with this phrase thanks to Mark Carney, governor of the Bank of England, who used it to describe the country’s ability to fund its borrowing from overseas sources (and the willingness of those sources to lend). The current account deficit was near record levels at the end of last year and in the first quarter of this, hence the concerns.

On Friday, new figures are published for the second quarter. The question is whether Britain will still need to finance itself from abroad to the tune of roughly 7 per cent of national income. The high international deficit and the EU referendum has raised fears that the “kindness of strangers” will evaporate, leading to a sharp fall in sterling and a crunch in the economy as the current account adjusts so that Britain is no longer so reliant on foreign money.

So far, however, sterling has weakened sharply but then stabilised, while funding has continued. This is partly because the weakness in the current account has stemmed not from imports rising much faster than exports, but because Britain has earned less on assets held abroad than foreigners have on their UK assets.

The ONS has already published figures showing the UK’s trade deficit increased by £2bn in the second quarter, so the crucial number to watch on Friday is what has happened to investment income flows.

This will tell us how much the UK relied on foreign lending before the referendum, but the figures still will not tell us much about the impact of the Brexit vote and subsequent depreciation of sterling.

On average, forecasters predict the UK’s current account deficit fell to £30.5bn in the second quarter, down from £32.6bn in the first.

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