Uncertainty over vote on EU membership weighs on UK economy

AP News
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Posted: May 05, 2016 7:36 AM
Uncertainty over vote on EU membership weighs on UK economy

LONDON (AP) — Uncertainty over Britain's looming vote on whether to remain in the European Union is weighing on the nation's economy, with another key indicator showing Thursday that growth is close to stagnating.

A gauge of activity in the services sector — the so-called Markit/CIPS purchasing managers' index — dropped more than expected in April to 52.3 points from 53.7 in March, the lowest since February 2013. The figure is on a 100-point scale, with the level of 50 separating contraction from expansion.

Because nearly 80 percent of Britain's economy is based on services, the drop points a broad-based slowdown.

"Uncertainty emanating from the EU referendum has brought the recovery to its knees," said Samuel Tombs, the chief U.K. economist for Pantheon Macroeconomics.

The pessimism was reflected in two other surveys this week, with contractions in manufacturing activity and a slowdown in construction.

The surveys are closely watched by the Bank of England as an overall gauge of the economy's strength. Chris Williamson, the chief economist at financial information provider Markit, said the surveys show growth grinding to a near halt after the economy expanded by a quarterly 0.4 percent in the first three months of 2016.

"The deterioration in April pushes the surveys into territory which has in the past seen the Bank of England start to worry about the need to revive growth, either by cutting interest rates or through non-standard measures such as quantitative easing," Williamson said. Quantitative easing is a form of stimulus in which a central bank typically buys bonds from banks as a way to boost lending.

The surveys revived worry about a country still struggling to overcome the lingering impact of the 2008 financial crisis. James Sproule, chief economist at the Institute of Directors, argued that underlying factors besides a possible British exit from the EU — or "Brexit" — may be feeding into a "less than rosy economic picture."

"The question we must ask is whether growth is built on solid foundations," he said. "My concern is that the exceptional period we are living in of low rates and cheap money is not the basis of a sustainable economy."