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Challenges mounting for the UK economy

Despite a successful vaccination programme and a post-lockdown boom, what challenges await the UK economy in 2022?

The UK’s successful vaccination programme and subsequent re-opening boost led us to hold an overweight in UK equities for much of the year. But challenges are now mounting for the UK economy and we moved to an underweight position in mid-September, reflecting the more cautious approach to risk in the portfolio as a whole.

Things were looking good for the UK economy in the Spring of 2021. The UK underwent one of the strongest vaccine-led recoveries in developed markets. Services PMIs moved comfortably into expansion territory as economic activity came back online in many sectors that had been effectively shut down because of lockdown restrictions. In addition, UK equities were trading at a discount to the richer valuations in other developed markets, largely due worries about the ongoing impact of Brexit. As the year progressed, the preference towards the UK proved rewarding as UK equities gained strongly over the YTD period.

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A year of two halves

However, that re-opening boost is now firmly in the past and the UK economy now faces several challenges that have led us to reduce our exposure. First, inflation is becoming a major headache for the Bank of England. The current bout of price rises is in part due to pandemic-related bottlenecks. However, unlike the Federal Reserve and the ECB, the Bank of England still views its 2% inflation target as an upper limit rather than an average, and therefore feels duty-bound to act sooner to curb inflation. The recent guidance from the Bank of England has directed markets to expect a rate hike soon. However, we feel this would likely be a mistake given the weakness now showing in the UK’s economic growth.

Second, Covid-19 cases are once again rising in the UK, with hospitalisations and deaths now at their highest levels since March. Even though the government may not act to re-introduce official restrictions, people may choose to avoid activities with a higher likelihood of transmission anyway if they feel unsafe. Recent news of another virus mutation potentially more transmissible than the Delta variant only serves to underscore how fast the narrative could change for the worse.

Third, September marked the end of the furlough scheme that subsidised the wages of workers that would have been laid off due to the pandemic. Data on the impact that this will have on the jobs market is still coming in, but the transition adds additional uncertainty to the labour market. The effects of Covid-19 coupled with Brexit has led to a well-publicised acute shortage of workers in a number of roles, such as HGV drivers.

Hospitality too has experienced a shortage of workers, while at the same time trying to meet the increased demand associated with the economic re-opening. This is something I can attest to anecdotally, having recently been out marketing around the UK. A recurring theme in the hotels and restaurants I have visited is one of not enough staff to fill vacancies resulting in not all facilities being available. These staff shortages are having a knock-on effect on business and growth.

Lastly, the recent surge in energy prices in the UK is a serious concern. The UK use a relatively large proportion of natural gas to generate its electricity, and is more exposed to the extreme price moves. While the most obvious impact is higher inflation, we believe that markets are underestimating the potential hit to growth in both the UK and Europe, particularly if the winter is colder than usual and gas supply constraints do not improve.

What now?

As a result of the worsening outlook for the UK, we have lowered the exposure to the UK in the Open range. This mirrors our more cautious view of risk in general, having also moved to underweight equities overall. Global growth is slowing, inflation is a concern in many developed markets, and the fallout from China’s shift in direction of policy could yet spread to other markets. We have increased our cash position, especially in light of the inflation concerns weighing over government bonds, and have increased holdings of defensive equities such as utilities to add protection in the event of a market correction.

By Chris Forgan

Source: Money Marketing

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London set to drive UK recovery with business confidence highest in capital

London businesses are set to drive the UK’s economic recovery from the Covid-19 crisis over the coming months.

Firms in the capital are the most confident out of all regions across the country, according to Lloyds Bank’s latest businesses barometer survey.

65 per cent of London businesses are optimistic about their medium term prospects, up three percentage points over the last month.

Elevated confidence levels in the capital underlines the scale of recovery London businesses have undergone since the depths of the pandemic.

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The capital was one of the hardest hit areas of the UK due to a large proportion of the country’s leisure and hospitality sector being concentrated in the city.

Business confidence in the UK as a whole edged down three percentage points over the last month to 43 per cent as a result of firms becoming more pessimistic about the health of the British economy.

However, positivity is well above the long term average of 28 per cent.

An easing of supply chain breakdowns and shortages of crucial materials has improved trading conditions and boosted firms’ confidence levels.

But, swelling costs are making firms more willing to hike prices to protect margins. 45 per cent of businesses expect to increase prices, the highest proportion since Lloyds started tracking the data.

An increase in labour supply after the furlough scheme was fully wound down at the end of September has partially resolved businesses’ struggles in attracting enough workers to deliver normal services.

According to Lloyds, 90 per cent of businesses plan to bring back more than half of furloughed staff, indicating unemployment is unlikely to undergo a sharp uptick.

Hann-Ju Ho, senior economist Lloyds Bank Commercial Banking, said: “While economic optimism saw a slight dent in October due to rising costs and the on-going supply chain issues, it is clear that firms are still feeling relatively buoyant as overall business confidence remains high and above the long term average.”

By Jack Barnett

Source: City AM

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Perfect storm of glitches constrains UK economy

Severe shortages of raw materials, constrained labour supply and persistently high furlough rates are putting the UK economy in a vice, according to new official figures released today.

The Office for National Statistic’s latest business insights survey shows almost one in three hospitality firms are finding it harder to recruit workers compared to normal times.

One in four businesses reported higher prices for key inputs used in production processes, up from 21 per cent in May, with half of construction firms noting increases in input costs.

A staggering 67 per cent of businesses said a paucity of suitable candidates to fill roles was putting the brakes on recruitment activity, with professional and scientific firms experiencing the most acute skills shortages.

Despite figures released by the Treasury this morning showing the number of furlough workers had dropped to its lowest level since the onset of the Covid crisis, the rate at which people are leaving the scheme has slowed.

340,000 left furlough July, down sharply from 550,000 in June, prompting experts to warn Britain could face higher joblessness after the scheme winds down fully in just three weeks’ time.

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Charlie McCurdy, Economist at the Resolution Foundation, said: “The number of people coming off furlough over the summer has slowed to a trickle, as some firms and sectors – notably overseas tourism – struggle to return to pre-pandemic levels of activity.”

“As a result, up to a million employees could still be on furlough when the scheme closes at the end of this month.”

“While we expect most of these staff to return to their previous roles, a significant number will not, and we could see a fresh rise in unemployment this autumn.”

There are still 1.6m people on furlough, highlighting the scale of the mismatch between the supply of and the demand for labour in the UK. Data released by the Recruitment and Employment Confederation and KPMG today shows candidate supply levels fell at the fastest rate on record in August, while businesses ramped up hiring activity.

Severe supply and demand imbalances are prompting businesses to raise wages in a bid to attract talent, which is fuelling inflationary pressures. However, according to the ONS, 15 per cent of all British businesses cannot afford higher wages to attract workers.

There are concerns over whether worker shortages will clear. The governor of the Bank of England, Andrew Bailey, warned yesterday he is worried about persistent worker shortages producing stickier than expected inflation.

The ONS estimates inflation currently stands at two per cent annually. But, the Bank expects it to rise to four per cent by the end of the year.

By Jack Barnett

Source: City AM

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UK recovery slows as shoppers make tentative return

UK businesses suffered a “sharp slowdown” in August as staff shortages and supply chain issues dented the country’s economic recovery.

Data from UK information provider, IHS Market, shows the index that tracks output among UK companies fell to 55.3 – a six-month low.

The reading was a steep drop from July’s 59.2, and came as staff shortages and problems across supply chains constrained the ability of businesses to do their jobs.

Even though the UK saw the fastest rise in employment since IHS data began in 1998, backlogs of work increased for the sixth month in a row as businesses struggled to keep up with customer demand.

The August reading remains above 50 – which means the economy is growing – but the pace of progress has clearly slowed.

The data came as property investment trust Shaftesbury said shoppers were returning to the high street again.

The London-listed firm said the retailers in its buildings had reported improving trade, focused on the weekend.

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Weekly footfall is now at between 50 per cent – 60 per cent of its pre-pandemic levels, Shaftesbury said.

Encouragingly, it put the recovery down to more than a rise in Londoners venturing out, stating that people were once again travelling to the capital for shopping trips and that there had been a visible rise in tourists visiting too.

Shaftesbury chief executive Brian Bickell said: “We expect that early autumn will see a return of the West End’s exceptionally large office-based working population, which has always been an important contributor to our local weekday economy.”

He added that the momentum of the past four months had provided “a sound platform for the continuing revival of London’s West End in the important months ahead, leading up to Christmas and into the new year, and the prospects for a return to pre-pandemic patterns of life and activity”.

The improvements can be seen in the rent that Shaftesbury was able to collect in recent months.

In the three months to June 30, the company collected 51 per cent of contracted rent, compared with just 40 per cent between January and March this year.

It is also filling more space in the high streets.

At the end of March, 8.4 per cent of Shaftesbury’s sites lay vacant, but by the end of July nearly half of this space had been filled and the figure had fallen to 4.6 per cent.

Elsewhere in the economic data, weaker recoveries were seen in both the manufacturing and service sectors, with the later recording the greatest loss of momentum since July.

Analysis of comments provided by survey respondents suggested that the incidences of reduced output due to shortages of staff or materials were fourteen times higher than usual, and the largest since the survey began in January 1998.

New order growth eased slightly in August, with stronger export sales helping to cushion a slower recovery in domestic demand.

By Bradley Gerrard

Source: iNews

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UK economic recovery to continue but new COVID-19 strains a threat

UK economy will expand rapidly this quarter as additional coronavirus-related restrictions are lifted and further pent-up demand is unleashed, a Reuters poll found, but growth is at risk from new variants of COVID-19.

The country has suffered the highest death toll in Europe from the pandemic but a fast-moving vaccine rollout has allowed the government to withdraw many of the lockdown restrictions, with more set to lifted on Monday. read more

Gross domestic product will grow 2.5% this quarter, the July 12-15 poll found, a touch better than the 2.4% predicted last month. But medians showed that pace was expected to slow to 1.4% next quarter and then to 0.9% in early 2022, unchanged from last month’s forecasts.

“So far, the UK data look promising in two respects. First, vaccines seem to have significantly reduced the health risks from the virus,” said Holger Schmieding, chief economist at Berenberg.

“Second, the UK’s GDP estimate for May shows that activity has rebounded with the easing of restrictions.”

GDP expanded a monthly 0.8% in May, much faster than its typical pre-pandemic pace but down from April’s 2.0% surge, official data showed last week. read more

On an annual basis, growth was pegged at 6.7% this year – much stronger than the 6.2% predicted last month – and an unchanged 5.2% in 2022.

But when asked what was the biggest threat to those buoyant numbers over 70% of respondents said the spread of new variants of COVID-19.

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“COVID-19 cases are rising quickly again and are showing few signs of slowing. With infection numbers doubling every 8-9 days, daily cases above 100,000 are entirely possible in the coming weeks,” said James Smith, an economist at ING.

“Rising COVID-19 prevalence also means higher rates of contact tracing and self-isolation. These risks amplifying the current worker shortage in some of the consumer services industries, but could also see consumers reducing social contacts to mitigate the risk of having to stay at home for 10 days.”

PRICE PRESSURES

Like its peers, Britain has faced steep inflationary pressures as supply chains disrupted by the pandemic and increased demand have led to price rises.

Inflation was expected to average 2.2% this quarter and peak at 2.7% next quarter. However, that upswing is likely to be transitory and is driven by the pandemic-induced low base of last year.

So while those forecasts are well above the Bank of England’s 2% inflation target the central bank was not expected to increase borrowing costs from their record low of 0.10% until 2023.

None of the 82 economists polled expected a change when the Bank announces is next policy review on August 5.

BoE interest rate-setter Michael Saunders said on Thursday the central bank could decide to stop its current programme of government bond purchases early due to an unexpectedly sharp rise in inflation, a day after another top BoE official said the time for action might be approaching. read more

“There is a risk, however, that inflation strength will prove more persistent, which may put more pressure on the BoE to tighten policy,” said Chris Hare, senior economist at HSBC.

“There are genuine supply-demand imbalances which have become apparent during the economic reopening, which we think could persist or even build in the near term.”

By Jonathan Cable

Source: Reuters

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UK economic recovery continues but inflationary pressures build – PMI

The UK economic recovery continued in June, research published on Wednesday showed, prompting a record hike in employment, but inflationary pressures gathered pace.

The IHS Markit flash UK composite output index was 61.7 in June. That was down on May’s final reading of 62.9, and was marginally below consensus for 61.5. But it remains among the fastest rates of expansion seen since the series began in January 1998.

The services business activity index was 61.7, compared to 62.9 in May, while the manufacturing PMI printed at 64.2 against May’s 65.6. The manufacturing output index was 62.0, one point lower than May’s 63.0 reading.

IHS Markit said companies had responded to rising workloads by hiring extra staff “at an unprecedent rate”. The composite employment index hit a record high of 58.5 in June, up on May’s 57.4.

But it also noted input costs and output prices had reached fresh highs, as supply-chain disruptions weighed heavily.

Chris Williamson, chief business economist at IHS Markit, said: “Businesses are reporting an ongoing surge in demand in June as the economy reopens, led by the hospitality sector, meaning the second quarter looks to have seen economic growth rebound sharply from the first quarter’s decline.

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“There are some signs that the rate of expansion appears to have peaked, as both output and new order growth cooled slightly from May’s record performance, but full order books and a further loosening of virus-fighting restrictions should nevertheless help ensure growth remains strong as we head through the summer.”

Duncan Brock, group director at the Chartered Institute of Procurement and Supply, said: “As materials were increasingly hard to come by, they once again became more expensive. Record cost inflation last seen in 2008 filtered through to increasing output costs, as manufacturers were unable to absorb these rapid rises any longer.

“In service businesses, consumers were hit with considerably-higher prices for food and hospitality, increasing the threat of soaring inflation in the UK economy this summer.”

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “The PMIs remain one of the most upbeat indicators of the pace of the economic recovery, insofar as they signal only a modest slowdown in month-to-month GDP group in June. Other surveys, however, point to a sharper deceleration.

“The further rise in the composite output price index, to 60.6 – the highest level in its 23-year history – confirms that price pressures are building quickly. Nonetheless, with labour market slack likely to increase in the fourth quarter, when the furlough schemes is wound down, and Covid-related costs to diminish as the country exits the pandemic, we continue to think that the MPC will look through the upcoming bout of above-target CPI inflation.”

Joshua Mahony, senior market analyst at IG, said: “While both manufacturing and services PMI readings weakened in the UK, there are many aspects to be encouraged by, with employment continuing to remain buoyant, and the 12-month outlook remaining optimistic.”

IHS Market surveyed its panel of 650 manufacturers and 650 service providers between 11 and 21 June. Final data will be published by 5 July.

By Abigail Townsend

Source: ShareCast

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UK economy posts record annual jump in April, up 27.6%

Britain’s economic output in April was a record 27.6% larger than 12 months before, official data showed on Friday, an increase that reflects recent reopening and the scale of disruption to everyday life early in the COVID pandemic.

The figure matched the consensus of economists polled by Reuters.

In April alone, output rose by 2.3%, marking the fastest growth since July, the Office for National Statistics (ONS) said, and compared with the Reuters poll consensus for a 2.2% increase.

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But British economic output is still 3.7% lower than in February 2020, before the pandemic led to lockdown measures.

“Today’s figures are a promising sign that our economy is beginning to recover,” finance minister Rishi Sunak said in a statement.

Last month the Bank of England raised its forecast for British economic growth in 2021 to 7.25% from February’s estimate of 5.0%.

That would be the fastest annual growth since 1941 when Britain was rearming during World War Two. But it comes after output plunged by almost 10%, the biggest drop in more than 300 years.

Source: CNBC

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UK economy accelerates as tourism and hospitality emerge from lockdown

The UK economy accelerated in May as tourism and recreation firms reopened, but the delay in ending Covid-19 restrictions is putting hospitality firms at risk, research shows.

Eleven out of 14 UK sectors reported faster growth in output month on month in May, up from nine in April, according to the Lloyds Bank UK Recovery Tracker, as the UK moved further out of lockdown.

The tracker found that the UK tourism and recreation sector recorded the sharpest rise in output growth as British hotels, pubs and restaurants benefited from pent-up consumer demand.

Firms took on more staff to handle rising demand. All 14 sectors reported jobs growth in May, led by manufacturing, while the tourism and recreation sector added jobs for the first time since January 2020.

Jeavon Lolay, the head of economics and market insight for commercial banking at Lloyds Bank, said sectors that had been acutely affected by coronavirus restrictions were now outpacing those that operated more freely during lockdown.

“Whether the four-week delay to further easing of restrictions will impact this trend is unclear. But while the delay is understandably disappointing for many businesses, there’s no denying that the economy is now on a much sounder footing,” Lolay said.

The survey also showed that companies across the economy raised their prices in May, led by chemicals and metals and mining producers.

“While UK inflation jumped higher than expected in May and stronger demand saw more businesses pass on rising costs to their customers, it’s arguably still too soon to worry about inflation spiralling out of control,” Lolay said.

The fast-food chain McDonald’s announced expansion plans on Sunday and will recruit 20,000 workers over the next 12 months as it opens 50 new restaurants in the UK and Ireland.

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But the Covid-19 restrictions are continuing to hurt the hospitality sector, particularly the night-time economy.

About 25,000 licensed premises were still shut at the end of May 2021, according to research from CGA and AlixPartners, which warned that thousands more clubs, restaurants, pubs and bars are at risk from the delay to ending lockdown.

CGA and AlixPartners found that more than three-quarters of Britain’s licensed sites were trading by the end of last month, up from about a third in April, thanks to the return of inside service.

However, while more than nine in 10 food pubs, high street pubs and casual dining restaurants are open, sectors that rely on late-night trading are still in jeopardy of failure, the report found.

“Many operators will have reopened in anticipation of restrictions falling away on 21 June, and likely forecast and accepted suppressed trade for the period up to that point,” said Graeme Smith, the managing director of AlixPartners.

“While far from ideal, knowing that ‘freedom day’ was on the horizon meant operators could battle through this challenging time, perhaps welcoming team members back to the business in anticipation and getting operations up to speed. A further delay of four weeks is a devastating blow, creating significant uncertainty and further financial strain.”

Michael Kill, the chief executive of the Night Time Industries Association, has urged the government to lift restrictions on 5 July – at the two-week review point set when the restrictions were extended. He said the industry was “on the verge of breaking”.

By Graeme Wearden

Source: The Guardian

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Delay to ending lockdown would hit UK economic recovery

A delay to the planned lifting of lockdown on June 21 would “materially” hamper UK economic recovery from the pandemic, a major business group has warned.

The British Chambers of Commerce (BCC) said the economy is in a “temporary sweet spot”, but there would be a big threat to the outlook from any Government move to push back the lockdown road map, as well as from rising inflation.

It cautioned this could derail the current rebound, which the BCC predicts will see the UK economy grow by 6.8% this year – the strongest since official records began.

The biggest spending surge since 1988 is set to help the UK economy recover from a 1.5% contraction in the first quarter to grow by 4.1% between April and June as lockdown restrictions lift, according to the group.

Pent-up demand from Britons with savings built up in lockdown is set to see the economy continue growing by 3.5% in the third quarter, before easing back to 1.1% in the final three months.

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The squeeze on activity and the damage to confidence from a marked delay to the full lifting of restrictions or further restrictions to combat Covid variants would materially slow the recovery

Suren Thiru, BCC head of economics

The BCC said this will be largely driven by a 5.5% rise in consumer spending in 2021 – the strongest for 33 years – while business investment will surge by 4.1%.

But it warned over the risks from inflation and ongoing restrictions.

The economic rebound will also be uneven across sectors and for different people, with the BCC adding that trade will suffer from post-Brexit disruption.

Suren Thiru, head of economics at the BCC, said: “The risks to the outlook are on the downside.

“A more significant surge in inflation would weigh on a consumer-led revival by eroding their spending power.

“The squeeze on activity and the damage to confidence from a marked delay to the full lifting of restrictions or further restrictions to combat Covid variants would materially slow the recovery.”

The BCC forecasts inflation – currently at 1.5% – will jump to a three-year high of 2.6% in the third quarter of 2021, but should ease back to the 2% target in the second quarter of next year.

The BCC also raised worries over youth unemployment, with job prospects for young people set to suffer the most from the pandemic.

While it forecasts the wider rate of unemployment to peak at 6% in 2021 thanks to furlough support, the BCC expects the youth unemployment rate to soar to 15.6% once the scheme ends.

Hannah Essex, co-executive director of the BCC, said: “Young people now entering the workforce and those who lost jobs during the pandemic are at particular risk of longer-term unemployment.

“As the economy emerges from the pandemic, we need to create a dynamic and flexible skills system that meets the needs of local employers and supports individuals looking to return to the jobs market.”

Source: iTV

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UK economy, gearing up for recovery, grows more than expected

UK economy grew more strongly than expected in March as it gathered speed for a bounce-back from its coronavirus slump of 2020, official data showed on Wednesday.

The 2.1% growth from February was led by the reopening of schools which, alongside COVID-19 testing and vaccinations, pushed up activity in the public sector and by retailers as consumers spent some of their lockdown savings.

There was also a burst of work in the construction sector ahead of the expiry of a tax break for home-buyers.

Analysts polled by Reuters had expected monthly growth of 1.3% for world’s fifth-biggest economy.

“Businesses and the government alike will feel this data marks a turning point,” Ana Boata, head of macroeconomic research at trade credit insurer Euler Hermes, said.

“With the ongoing easing of restrictions, confirmed this week by the prime minister, there’s hope that this could be the start of a long hot summer for British businesses.”

Over the first three months of 2021, when the country was under a third lockdown, gross domestic product shrank by 1.5%, the Office for National Statistics said.

Although a less severe hit than initially feared, Samuel Tombs, an economist with Pantheon Macroeconomics, said it meant Britain almost certainly remained the laggard among the Group of Seven rich countries for the fourth quarter in a row.

However, British GDP looked on course grow by 5% in the April-to-June period “which should mean that the UK finally hands over the wooden spoon to another G7 economy.”

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The BoE said last week it expected the UK economy would recover quickly as the country speeds ahead with Europe’s fastest vaccination programme and coronavirus restrictions are lifted.

Its forecast for 7.25% growth in 2021 would be the fastest since a Second World War rush to rearm although by comparison GDP collapsed by 9.8% in 2020, its deepest slump in over three centuries.

“Despite a difficult start to this year, economic growth in March is a promising sign of things to come,” finance minister Rishi Sunak said.

“As we cautiously reopen the economy, I will continue to take all the steps necessary to support our recovery.”

Britain’s economy remained 8.7% smaller than at the end of 2019. The BoE expects it will be back to its pre-pandemic size by the end of this year.

MORE REOPENING AHEAD

Prime Minister Boris Johnson allowed non-essential shops to reopen and outdoor hospitality to resume in April in England and there have been signs that the economy accelerated in response.

Further relaxations are due to take place next week before the lifting of almost all remaining restrictions in late June.

The ONS data showed Britain’s dominant services industry grew by 1.9% in March from February, its strongest growth since last August, while manufacturing and construction also grew more strongly than expected by analysts in the Reuters poll.

Separate trade figures showed Britain imported more goods from non-EU countries than EU countries during the first quarter for the first time since records began in 1997.

The ONS warned it was too soon to say if this was the start of a trend or just short-term disruption.

“Exports of goods to the EU continued to increase in March and are now almost back to their December level,” ONS statistician Darren Morgan said. “However, imports from Europe remain sluggish.”

Business investment fell by almost 12% in the January-March period. The ONS said some companies brought forward investment plans to late 2020 to avoid disruption caused by leaving the EU’s Single Market while others delayed plans for early 2021 to take advantage of a new tax break that launched in April.

By William Schomberg, Andy Bruce

Source: Reuters

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