Britain heads back to the Brexit table, plans in hand, economy in decline

[August 25, 2017]  By Jeremy Gaunt

LONDON (Reuters) - Britain's economy is beginning to feel the Brexit pinch, or perhaps given the strong performance of the rest of the world economy, it should be punch.

After a prolonged period of relatively benign economic numbers following last year's vote to leave the European Union, there are now signs of a potentially serious slow down.

They stretch from retrenching households to hesitant businesses, from a widening trade deficit to lackluster manufacturing. They also come just as the EU and Britain return to the negotiating table, the latter with a handful of new post-Brexit position papers.

Since mid-August, London has been releasing official papers on issues such as trade, customs, the European Court of Justice, and what the province of Northern Ireland's future border with EU member Ireland will look like.

The performance of Britain's pound over that period suggests few people were impressed enough with them -- or with the likelihood they will come to pass -- to overcome the economic signs.

Running through the release of five official Brexit papers, the pound has lost more than 1.4 percent against the dollar since Aug 14 and the euro has gained the same against sterling.

While the pound weakness is not directly linked to the papers, their release has clearly done nothing to improve confidence in the currency.

That is at least in part because the UK economy is starting to feel the impact of Brexit.

"Economic momentum looks uncertain. Monthly factory orders this year suggest that the sector is failing to capitalize from a weaker sterling and a pick-up in global trade," Jaisal Pastakia, investment manager at Heartwood Investment Management, said in note.

Elsewhere, second quarter economic growth figures showed consumer spending slumping to a two and a half year low of just 0.1 percent quarter-on-quarter.

Business investment was also at a standstill. Barclays said this was "highlighting just how much businesses are holding back investment in the face of high levels of uncertainty regarding the outlook for business conditions."

Add to that a warning from Britain's heavyweight food supply industry that EU workers it relies on are already leaving or considering doing so.

BACK TO THE TABLE

It is not completely linear, of course. Car manufacturing bounced back in July and the unemployment rate is falling.

Last month's purchasing managers indexes also pointed to steady -- albeit sluggish -- economic growth over the coming months.

An official carries a Union Jack flag ahead of a news conference by Britain's Secretary of State for Exiting the European Union David Davis and European Union's chief Brexit negotiator Michel Barnier in Brussels, Belgium July 20, 2017. REUTERS/Francois Lenoir/File Photo

So the wheels have not come off.

But the backdrop for Britain as it returns to the table on Monday is nonetheless a stark contrast to what the other side is experiencing.

The euro zone, which comprises 19 of what will be the remaining 27 EU members, is flying high.

The latest data shows annual growth at 2.2 percent, the highest for more than six years; economic sentiment is cruising at levels last seen before the financial crisis; even the bloc's notoriously high unemployment rate is falling.

Improvement is fairly widespread among euro zone countries, meanwhile.

Florian Hense, an economist with Berenberg bank, notes the euro zone has now had 17 consecutive quarters of growth.

"And most countries of the currency union were at the party," he said in a note. "Countries that have for a very long time... struggled do get a stable footing, are beginning to recover, too."

Whether this continues or is peaking may become clearer in the coming week when various sentiment indicators, unemployment and manufacturing reports are released.

The flash composite purchasing manager index has already shown the bloc to be well in expansion mode with no sign of an August slowdown.

Inflation too will be on the agenda. It is expected to be 1.4 percent year-on-year, too far below the European Central Bank's near 2 percent target to impact rates decisions on its own.

But the growth picture is enough to have the ECB at least thinking about tapering its quantitative easing bond-buying programme.

Some have taken to calling that QExit.

(Reporting by Jeremy Gaunt; Editing by Toby Chopra)

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