UK economy lags further behind resurgent euro zone

LONDON (Reuters) - Britain’s economy is ending 2017 lagging the euro zone’s strong recovery as the effects of last year’s Brexit vote weigh on shoppers and on businesses, according to a range of data released on Tuesday.

FILE PHOTO: Customers sit inside the Da Mario restaurant in London, Britain, August 15, 2017. REUTERS/Hannah McKay

The dominant services sector lost some momentum in November while prices charged by companies rose at their fastest pace in nearly 10 years, potentially adding to the country’s inflation problem, a closely watched survey showed.

Another report showed shoppers spent more of their budgets on the rising cost of food, while car sales fell for the eighth month in a row in November.

Britain’s economy withstood the initial shock of the Brexit vote in 2016 but has slowed sharply this year as the pound’s plunge following the referendum pushed up inflation and hit households at a time when wages are growing only sluggishly.

Companies have meanwhile slowed investment as they wait to see what leaving the European Union means for them, potentially adding to Britain’s weak productivity growth -- another drag on the economy.

Prime Minister Theresa May failed to clinch a deal on Monday to open talks on post-Brexit free trade with the European Union after a tentative deal with Dublin to keep EU rules in Northern Ireland angered her political allies in Belfast.

The monthly IHS Markit/CIPS services Purchasing Managers’ Index (PMI), covering businesses from hotels to hairdressers, fell to 53.8 in November from to 55.6 in October, at the low end of most forecasts from economists polled by Reuters.

Taken along with a pickup for the smaller manufacturing and construction sectors, November’s PMIs suggested the economy was likely to see robust quarterly growth of about 0.45 percent in late 2017, IHS Markit said -- faster than earlier in the year.

But businesses were downbeat about the prospects for the economy and the composite PMI of British services plus manufacturing fell to 54.9, a long way short of the euro zone’s 57.5, its highest since April 2011. [EUR/PMIS]

“The euro zone is going great guns at the moment and it will almost certainly outpace the UK this year and next,” Investec economist Philip Shaw said.

Chris Williamson, an economist with IHS Markit, said the big news in the services survey was the jump in prices charged by companies. They hit their highest level since February 2008, and the second-highest since the survey began in 1996.

That is likely to be a worrying sign for the Bank of England which has said inflation has probably already peaked and has signalled only a gradual rise in interest rates after it raised borrowing costs for the first time in a decade last month.

“Rising oil prices were again to blame in November, with firms also reporting the need to pass higher costs of a wide variety of other inputs on to customers as a result of the weak pound having driven up import prices,” Williamson said.

“As such, the survey data suggest that inflationary pressures have yet to peak.”

Graphics by Andy Bruce; Writing by William Schomberg; Editing by Catherine Evans