UK economy weakest since Sept. 2012 as Brexit crisis intensifies

FILE PHOTO: Wads of British Pound Sterling banknotes are stacked in piles at the Money Service Austria company's headquarters in Vienna, Austria, November 16, 2017. REUTERS/Leonhard Foeger/File Photo

A gauge of Britain’s economic health slumped to an almost seven-year low in August, dragged down by deepening pessimism among services companies, retailers and consumers who expect inflation to rise sharply as the Brexit crisis escalates.

The European Commission said on Thursday its Economic Sentiment Indicator (ESI) for Britain fell to 92.5 from 94.3 in July, its lowest level since September 2012.

The drop came despite an uptick in morale in the struggling manufacturing sector, towards which the ESI is heavily weighted.

British manufacturers, who account for about 10% of the country’s economy, are facing the possibility of a no-deal Brexit which is likely to hurt their supply chains, plus a slowdown in the global economy.

Overall, the ESI added to signs that Britain’s economy could struggle to rebound meaningfully from its contraction in the second quarter, the first time it shrank since 2012.

Until recently, consumers had largely taken Brexit in their stride, helped by wages that have been growing at the fastest pace in more than a decade and modest inflation.

That helped to support growth at a time when many companies were cutting back on investment because of uncertainty about Brexit. But it also left the economy reliant on consumer spending.

“August’s … survey of U.K. business and consumer confidence raises concern that the consumer sector may soon succumb to the malaise that has taken hold in the manufacturing sector,” Gabriella Dickens, economist at consultancy Capital Economics, said.

The European Commission said inflation expectations among British consumers hit their highest level since 1990, possibly reflecting the pound’s fall to its lowest level in three years against other currencies in the first half of August.

The public’s expectations for the economy were the lowest since December 2011, the survey showed.