January 5, 2017 / 12:07 AM / 10 months ago

UK economy keeps momentum but inflation pressures mount - BCC survey

LONDON (Reuters) - Britain’s economy retained its momentum through the final months of 2016, but inflation pressures mounted at the fastest pace since records began almost 20 years ago, a major business survey showed on Thursday.

Shoppers carry bags past a Christmas window display on New Bond Street in London, Britain December 18, 2016. REUTERS/Neil Hall

The British Chambers of Commerce (BCC) said sales and hiring improved modestly in the fourth quarter, adding to signs that Britain likely outpaced most advanced economies in 2016.

But its quarterly survey also pointed to complications stemming from last June’s vote to leave the European Union.

A record number of manufacturers expect to raise prices in the next three months - a direct consequence of the weak pound, still down almost 12 percent on a trade-weighted basis since June 23. More businesses in the services sector plan to raise prices than at any time since early 2011.

While businesses reported a marginal improvement in export sales during the fourth quarter, the BCC said there was little evidence that sterling’s weakness had prompted a boom in overseas demand.

Inflation pressures were particularly acute for manufacturers, who are suffering from soaring raw material costs. The BCC’s price records extend back to the second quarter of 1997.

“Overall, our findings suggest growth will continue in 2017, albeit at a more modest pace,” said Adam Marshall, the BCC’s director general.

“Inflation has emerged in our survey as a rising concern for many businesses. Both manufacturing and services firms say they are under pressure, particularly from the rising cost of inputs, which is squeezing margins and may weaken future investment.”

INFLATION OVERSHOOT?

The BCC’s survey - the largest of its kind - will be of interest to Bank of England policymakers.

Although they have said they are willing to tolerate some overshoot of their 2 percent inflation target while the weak pound feeds through into prices, they have warned that there are limits.

Despite a sharp increase in inflation, the BCC said pressure on pay settlements remained low by historical standards - another sign that British wages in real terms are likely to drop sharply, or even shrink, later this year.

The BCC’s measures of investment intentions increased slightly during the fourth quarter, albeit only after hitting four-year lows in the previous three months.

Still, businesses became a little more optimistic about the outlook compared with the previous quarter, even if confidence in both turnover and profit remained relatively low compared with levels over the past three years.

Britain’s economy looks on track to expand by more than 2 percent in 2016 - faster than almost all other big advanced economies except perhaps the United States. Economists polled by Reuters expect Britain’s growth rate to more than halve in 2017 to 1.1 percent. [ECILT/GB]

The BCC surveyed more than 7,200 companies between Nov. 7 and Nov. 28.

The Markit/CIPS Services Purchasing Managers’ Index for December, another closely-watched business survey, is due at 0930 GMT. Economists polled by Reuters expect it to show growth slowed slightly.

Reporting by Andy Bruce; Editing by Gareth Jones

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