UK economy's strong growth since Brexit vote starts to slow

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[March 03, 2017]  By Andy Bruce

LONDON (Reuters) - Britain's unexpectedly strong economic growth since last June's Brexit vote may be starting to fade as inflation picks up, according to a major business survey that chimed with notes of caution from several top companies.

Slowing consumer spending started to hurt services companies in February, an unpromising signal for the economy ahead of Britain's divorce with the European Union, Friday's Markit/CIPS UK Services Purchasing Managers' Index (PMI) showed.

As finance minister Philip Hammond puts the final touches on his first annual budget on March 8, the survey is likely to reinforce his sense that Britain's strong growth since last year's vote to leave the EU will fade this year.

The services PMI fell to a five-month low of 53.3 from 54.5 in January and suggested the economy is now expanding at a quarterly pace of around 0.4 percent - much slower than the 0.7 percent expansion during the fourth quarter of 2016.

Sterling slid to a seven-week low against the dollar after the PMI was published, prompting investors to discount further the chance of the Bank of England raising record low interest rates any time soon.

Lacklustre reports from major British companies added to the sense of a tougher 2017 for the economy than last year.

Advertising giant WPP <WPP.>, the kind of company regarded by analysts as a bellwether for the economy, warned of a tough economic background and its forecast for growth this year came in below analyst forecasts.

Earlier this week, British broadcaster ITV <ITV.L> reported the first decline in advertising revenue since 2009.

Britain's economy expanded faster than most of its developed world peers in 2016 but economists think rising inflation is starting to weigh on consumers and business profit margins, something corroborated by the PMI survey.

"Notwithstanding the disappointment, that is what everyone has been expecting to happen - we just hoped we were wrong," said Alan Clarke, head of European fixed income strategy at Scotiabank, on the PMI.

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A man carrying a bag adorned with a British Union Jack flag steps into a bus departing from Sofia's central bus station to London via Austria, Germany and France January 2, 2014. REUTERS/Stoyan Nenov

Data company Markit said some firms in its survey reported cautious spending by British consumers.

It highlighted strong inflation pressure with input costs and selling prices in services companies increasing at the fastest rates since mid-2008 when consumer price inflation hit more than 5 percent.

"Weaker consumer spending was a key cause of slower service sector growth, suggesting that household budgets are starting to crack under the strain of higher prices and weak wage growth," Chris Williamson, chief business economist at IHS Markit, said.

Despite the inflation pressure, Williamson said the PMI's fall left it around levels more consistent with a further rate cut by the Bank of England than an increase.

Last month BoE Governor Mark Carney said he remained convinced that inflation would go above the bank's 2 percent target only temporarily and due entirely to the fall in the value of the pound since the Brexit vote, rather than more deep-seated price pressures.

The pound may have further to fall, a Reuters poll of foreign exchange strategists and economists showed on Thursday. [GBP/POLL]

Prime Minister Theresa May intends to trigger the formal process for separating from the EU by the end of this month.

Although growth slowed in February, services firms remained confident about their prospects in the next 12 months, with optimism running just below January's eight-month high.

(Editing by Toby Chopra)

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