January 5, 2017 / 9:37 AM / 9 months ago

Price pressures mount as UK economy records strong end to 2016

A bus drives across a bridge as the sun sets over the Chelsea area in London, Britain December 11, 2016. REUTERS/Clodagh Kilcoyne

LONDON (Reuters) - Britain’s economy finished 2016 strongly, growing at the fastest pace since mid-2015 according to one major survey, but higher prices look set to hit consumers soon as firms pass on a big rise in costs since June’s vote to leave the European Union.

Companies in the dominant services sector reported activity rose at its fastest rate in 17 months in December, beating all forecasts in a Reuters poll and keeping Britain on track to be one of the world’s fastest-growing advanced economies last year.

However, the Markit Purchasing Managers Index and a separate survey from the British Chambers of Commerce showed services firms are planning the most widespread price rises since 2011, raising the chance that inflation will climb rapidly.

More manufacturers in the BCC survey - which was conducted in November - plan to raise prices than at any time since the survey started asking about this nearly 20 years ago.

Bank of England chief economist Andy Haldane said the Brexit vote had little effect on Britons in 2016, but that was likely to change this year as price rises trickled through.

“That will in turn produce something of a squeeze on the spending power of consumers and may lead them to throttle back somewhat in their spending plans,” Haldane said at an event hosted by London’s Institute for Government think tank.

An immediate fall in spending was not inevitable, however, and households could eat further into their savings, he added.

Sterling’s fall of nearly 20 percent against the U.S. dollar since the Brexit vote was cited by companies in both surveys as a major factor pushing up costs.

The weak pound pushed up food and fuel prices strongly and costs for wages, plastic packaging and IT rose too, Markit said.

STRONG GROWTH

Britain’s economy probably grew 0.5 percent in the final three months of 2016, barely slowing from the robust pace seen in the three months just after the Brexit vote, Markit said.

Separate figures showed households bought a record 2.69 million new cars last year.

“The UK economy continues to defy widely held expectations of a Brexit-driven slowdown,” IHS Markit’s chief business economist, Chris Williamson, said.

But this is expected to change in 2017. A Reuters poll last month showed economic growth was forecast to halve to 1.1 percent this year as inflation approaches 3 percent from less than 1 percent last year.

Higher prices are likely to sap consumer spending - which is being supported by the fastest borrowing growth in 11 years - while the start of formal Brexit talks before the end of March will kick off a process that companies fear could lead to reduced access to EU markets.

This leaves the Bank of England in a quandary after it cut interest rates to a record-low 0.25 percent in August on fears of a sharp economic slowdown. In November the BoE said rates could move in either direction as it was only prepared to tolerate a limited overshoot of its 2 percent inflation target.

Haldane said the central bank faced a difficult balancing act but would stick to its neutral stance for now. He played down worries about consumer borrowing, saying it would be wrong to be too alarmist as overall borrowing - which includes mortgage lending - was growing much more slowly.

Samuel Tombs, an economist at Pantheon Macroeconomics, said the PMI data was still well below levels which had triggered past rate rises. “We expect growth in activity to be far too weak and uncertainty about the economic outlook to be too pressing for the (BoE) to hike rates this year,” Tombs said.

Graphic by Andy Bruce; Editing by Tom Heneghan

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