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Brexit latest: Services confidence falls at fastest rate since 2009

The balance of consumer services firms who were optimistic about the general business situation in August was -37, down from +9 in May before the European Union referendum vote, according to the CBI

Economics Editor

Monday 29 August 2016 15:47 BST

Confidence in the restaurant sector has fallen according to the CBI (all pics: Ian Herbert)

Optimism in the UK’s dominant service sector has fallen at its fastest rate in seven years in the wake of the Brexit vote according to the latest quarterly survey from the CBI.

The business lobby group found that in consumer services the balance of firms who were optimistic about the general business situation in August was -37, down from +9 in May before the referendum vote.

This represented the biggest fall in confidence since February 2009.

The evaporation of confidence for business and professional services firms was also striking.

Here, the balance of firms who were optimistic about the situation fell to -30, down from -5 in May and the biggest quarterly decline since 2011.

Biggest drop since 2009...

CBI

Biggest drop since 2011

CBI

The balance of these firms expecting to expand operations also fell to -21, down from +5 in May

The fate of the services economy in the wake of the Brexit vote is pivotal since it accounts for just under 80 per cent of UK output and it has been the main driver of GDP growth since 2013.

The survey was conducted between 28 July and 12 August. Sixty one consumer service firms were questioned and 136 business and professional firms.

However, despite finding steep falls in confidence, the CBI’s findings in terms of the actual level of business activity in the wake of the 23 June referendum were much less alarming.

The balance of firms reporting increased volumes in the consumer services sector was +3 in August, down only from +10 in May. And in the business and professional services sector the balance was -4, only a mild deterioration from -5 in May.

“Whilst the service sector has been rocked by the stormy waters of Brexit, especially when it comes to firms’ sense of optimism, the actual slowdown in growth on the office and shop floor has been relatively modest” said Anna Leach, the CBI’s Head of Economic Analysis and Surveys.

“But looking ahead, the service sector faces a challenging environment in which to grow and invest, with uncertainty about demand weighing on firms’ minds.”

Other business surveys have also suggested a steep decline in business sentiment since the Brexit vote, but the very limited amount of official data released since the referendum vote suggests that UK consumers have continued to spend.

The CBI survey covers firms ranging from management consultants to telecoms firms, to transport companies to hotels and restaurants.

A similarly ambiguous post-Brexit picture comes today from the latest Lloyds Bank Spending Power Report.

This found that that 62 per cent of consumers said the country’s financial situation was either “not good” or “not good at all” in July, up from 55 per cent in June before the referendum

However, it also found that 67 per cent felt their personal finance situation was “good” or “excellent”, the highest level in the survey’s history.

“How long such confidence lasts remains to be seen” said Robin Bulloch of Lloyds Bank. “Consumers’ spending power could be squeezed if the price of imported goods rises in the wake of a weaker pound following the EU referendum.”

6 ways Britain leaving the EU will affect you

Show all 6

1/66 ways Britain leaving the EU will affect you

6 ways Britain leaving the EU will affect you

More expensive foreign holidays

The first practical effect of a vote to Leave is that the pound will be worth less abroad, meaning foreign holidays will cost us more

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6 ways Britain leaving the EU will affect you

No immediate change in immigration status

The Prime Minister will have to address other immediate concerns. He is likely to reassure nationals of other EU countries living in the UK that their status is unchanged. That is what the Leave campaign has said, so, even after the Brexit negotiations are complete, those who are already in the UK would be allowed to stay

Getty

6 ways Britain leaving the EU will affect you

Higher inflation

A lower pound means that imports would become more expensive. This is likely to mean the return of inflation – a phenomenon with which many of us are unfamiliar because prices have been stable for so long, rising at no more than about 2 per cent a year. The effect may probably not be particularly noticeable in the first few months. At first price rises would be confined to imported goods – food and clothes being the most obvious – but inflation has a tendency to spread and to gain its own momentum

AFP/Getty Images

6 ways Britain leaving the EU will affect you

Interest rates might rise

The trouble with inflation is that the Bank of England has a legal obligation to keep it as close to 2 per cent a year as possible. If a fall in the pound threatens to push prices up faster than this, the Bank will raise interest rates. This acts against inflation in three ways. First, it makes the pound more attractive, because deposits in pounds will earn higher interest. Second, it reduces demand by putting up the cost of borrowing, and especially by taking larger mortgage payments out of the economy. Third, it makes it more expensive for businesses to borrow to expand output

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6 ways Britain leaving the EU will affect you

Did somebody say recession?

Mr Carney, the Treasury and a range of international economists have warned about this. Many Leave voters appear not to have believed them, or to think that they are exaggerating small, long-term effects. But there is no doubt that the Leave vote is a negative shock to the economy. This is because it changes expectations about the economy’s future performance. Even though Britain is not actually be leaving the EU for at least two years, companies and investors will start to move money out of Britain, or to scale back plans for expansion, because they are less confident about what would happen after 2018

AFP/Getty Images

6 ways Britain leaving the EU will affect you

And we wouldn’t even get our money back

All this will be happening while the Prime Minister, whoever he or she is, is negotiating the terms of our future access to the EU single market. In the meantime, our trade with the EU would be unaffected, except that companies elsewhere in the EU may be less interested in buying from us or selling to us, expecting tariff barriers to go up in two years’ time. Whoever the Chancellor is, he or she may feel the need to bring in a new Budget

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The pound instantly slumped to its lowest level against the dollar since the mid-1980s in the wake of the referendum and it is trading at a three year low against the euro.

The Lloyds barometer was compiled by surveying 2,000 Lloyds adult bank account holders between 8 and 21 July.

The closely-watched Purchasing Managers’ Indexes of activity for services and manufacturing collapsed in July, signalling (based on historic trends) an overall contraction of GDP in the third quarter of the year.

However, some analysts now think the damage may be less severe.

The latest PMIs for August will be released later this week and early next week.

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