LONDON – A raft of disappointing British economic figures on Friday reinforced concerns that this year's slowdown has broadened across sectors and extended into the second quarter of the year, when the country finally began high-level negotiations over its exit from the European Union.
Capping a week of fairly grim economic news, the Office for National Statistics said Friday that industrial output in Britain fell 0.1 percent in May from the previous month, against expectations for a 0.4 percent increase. It also reported a bigger than anticipated 1 billion-pound widening in the country's trade deficit to 3.1 billion pounds ($4 billion) in May and a surprise 1.2 percent monthly drop in construction output.
Economists said the figures suggest any rebound in growth from the first quarter will be muted and could delay an interest rate hike by the Bank of England, which is increasingly worried about import price increases stoked by the pound's sharp fall in value since last year's Brexit vote. In the first three months of 2017, the British economy grew by a muted quarterly rate of 0.2 percent, the lowest of all Group of Seven industrial economies, largely because higher inflation and Brexit uncertainties kept a lid on consumer spending.
"This morning's data paint a rather bleak picture for the U.K. economy and underline the challenges lying ahead," said Kay Daniel Neufeld, senior economist at the Centre for Economics and Business Research.
The pound fell sharply in the wake of the figures, and by late afternoon London trading was down 0.7 percent at $1.2877.
The British economy is facing a series of headwinds, mostly connected with its exit from the EU. In March, Prime Minister Theresa May triggered the two-year Brexit process but discussions only began in June after a general election in which her Conservative Party lost its majority in parliament. Uncertainty over Brexit has ratcheted higher in the wake of the election, especially if May ends up standing down as prime minister some time during the negotiating period or if there's another election.
The main economic concern relates to Britain's future trading relationship with the EU, the biggest source for the country's exports. The government has been pushing for a free trade agreement with the EU but others, particularly in business, think the trade links should be much tighter and that Britain should remain in the European single market, which guarantees the free movement of goods, services, capital and people.
Samuel Tombs, chief U.K. economist at Pantheon Macroeconomics, highlighted the construction sector as one that is "feeling acutely the adverse impact of Brexit uncertainty on the willingness of households and firms to make long-term financial commitments."
On Thursday, the leader of one of Britain's main business lobby groups put her organization's weight behind ongoing membership of the EU single market as well as the customs union. The customs union is a broad tariff-less area of trade that includes EU countries and some neighbors like Turkey, and which demands a common tariff on imports from third-party countries.
"Instead of a cliff edge, the U.K. needs a bridge to the new EU deal," said Carolyn Fairbairn, director-general of the Confederation of British Industry. "Our proposal is for the U.K. to seek to stay in the single market and a customs union until a final deal is in force."
The minority Conservative government, which has the support of a small Northern Ireland party in crucial votes in parliament, has ruled out continued membership of the single market as it would involve keeping the freedom of movement of people from the EU. It's also said it doesn't want to remain a member of the customs union as that would limit its ability to strike trade deals beyond the EU.
However, some in the government, including Treasury chief Philip Hammond, have been sounding more open to the idea of transitional arrangements after Brexit in light of concerns over the economic repercussions. These could involve ongoing membership of both the single market and the customs union for a few years.