UK survey suggests letdown for BoE hawks who see investment rebound

A man stands outside the Bank of England in the City of London

LONDON (Reuters) – Hopes of a recovery in investment by British companies — a reason why some Bank of England officials think the economy can handle higher interest rates — are likely to lead to disappointment, a closely watched survey suggested on Wednesday.

BoE rate-setter Michael Saunders has said he is “reasonably confident” that lower consumer spending will be offset by higher exports and investment, justifying his vote to raise interest rates from a record low 0.25 percent.

But other economists are less sure, a stance the latest Markit/CIPS surveys of British businesses would seem to support.

Business expectations in the services sector sank in June to their weakest level since last summer’s vote to leave the European Union, and they were not far off lows last reached in late 2011.

This gauge has been an early guide for the future performance of the investment intentions indicator of the BoE’s monthly agents summary, which is often cited by members of the Monetary Policy Committee. Governor Mark Carney and chief economist Andy Haldane both mentioned it in recent speeches.

The PMI’s index is strongly correlated with the indicator with about a four-month lead.

This suggests that recent progress in seen in the BoE’s investment intentions indicator will reverse soon.

Last month’s election setback for Prime Minister Theresa May, who lost her parliamentary majority in the June 8 ballot, may have influenced the downturn in sentiment in services companies in June. But the overall trend is clear as the PMI’s business expectations indicator has fallen in four of the last five months.

Official data on business investment are volatile from quarter to quarter. Last week the Office for National Statistics said it grew 0.6 percent in the first three months of 2017, only partially offsetting a fall in the fourth quarter.

The PMIs suggest another argument for higher interest rates – that exports will surge – may also be misplaced.

The export orders gauge of Monday’s manufacturing PMI slid to a five-month low in June.

While still indicating growth in exports, it left Britain as the weakest performer in terms of foreign orders – barring Greece – among big western European economies for a fourth month running.

(Reporting by Andy Bruce; editing by John Stonestreet)