UK Hospitality Economy Rebounds Following Brexit Uncertainty

IHSServices output and new business both rise following declines in July

Expectations improve from July’s 89-month low

Input prices rise at sharpest rate since November 2013

The UK hospitality sector returned to growth in August, according to PMI® survey data from IHS Markit and CIPS. Following abrupt contractions in output and new business in July linked to disruption related to the outcome of the EU referendum, the latest data signalled a return to growth as businesses reported that uncertainty had abated somewhat. Moreover, the forward-looking business expectations index recovered most of the ground lost in July when confidence took a knock from the Brexit vote amid political and economic uncertainty, albeit remaining weak by historical standards. The latest data also signalled rising inflationary pressure linked to the weak pound.

The Business Activity Index rebounded to 52.9 in August, from 47.4 in July, signalling a rise in UK services output. The month-on-month gain in the index, at 5.5 points, was the largest observed over the 20-year survey history, following a record drop of 4.9 points in July. The rate of expansion in the latest period was the fastest since May, but weaker than the long-run survey average.

Hospitality sector confidence returned to its pre-referendum level in August, having spiked lower in July due to uncertainty generated by the Brexit vote. Firms linked positive output expectations over the next 12 months to export opportunities, reduced uncertainty, stable markets, product launches, expansion plans and a recovery in the energy sector. The overall strength of sentiment nevertheless remained relatively subdued amid reports of ongoing uncertainty related to Brexit.

Input price inflation accelerated to a 33-month record in August, linked to the weak pound and rising fuel and labour costs. Subsequently, service providers raised their own prices at the sharpest rate since January 2014.

Chris Williamson, Chief Business Economist at IHS Markit, which compiles the survey:

“A record rise in the services PMI adds to the encouraging news seen in the manufacturing and construction sectors in August to suggest that an imminent recession will be avoided.

“The three PMI surveys point to a stagnation of the economy so far in the third quarter, meaning much hinges on the September data to see whether the economy contracts or ekes out modest growth

“It remains too early to say whether August’s upturn is a dead cat bounce or the start of a sustained post-shock recovery, but there’s plenty of anecdotal evidence to indicate that the initial shock of the June vote has begun to dissipate. Many companies are seeing business return to normal either simply by customer confidence rising or a stoic determination to “Buck Brexit” and carry on regardless.

“Uncertainty has certainly eased considerably, helped by the swift settling-in of a new government and central bank stimulus. However, although improving on July’s seven-year low, business confidence is still at one of its lowest levels seen over the past four years. Many companies remain worried about the outlook and how the economy will fare in the event of Brexit, suggesting that political and economic uncertainty is likely to prevail in coming months, subduing growth.”