UK economic sentiment rises along with improved EU mood

UK economic sentiment improved in December, according to a European Commission survey released on Monday.

The EC’s economic sentiment indicator for the UK increased to 112.4 in December from 108.8 in November, with an ESI of 100 representing the average between 1990 and 2016. The level in December was the higher for the UK since July.

For the eurozone, the indicator increased strongly by 1.4 points to 116.0, and by 1.6 points across the wider European Union to 115.9, reaching the highest levels since August 2000.

The industrial component of the UK index, which is given a 40% weighting, increased to 13.2 from 11.5; services, which is given a 30% weighting, increased to 5.7 after slipping into negative territory in November; consumer confidence, which is given a 20% weighting, worsened to -7.0 from 5.2% a month earlier; retail and construction, both of which are given a 5% weighting, respectively worsened to 0.6 from 9.8 and strengthened to -1.0 from -1.9.

Inflationary pressures, which have led to UK consumer price inflation topping 3% at the end of last year, may begin to relent, with the survey finding a net balances of +51 retailers and +21 manufacturers reported an intention to raise prices over the next three months, below their respective 12-month averages of +54 and +26. Furthermore, the balance of services firms intending to raise prices declined, albeit only to its 12-month average.

The survey adds to evidence that the breakthrough in Brexit talks in early December has done little to revive business confidence, said Pantheon Economics, which said the index was misleadingly strong as the industrial component is given a weight that not representative of its 15% of GDP.

"The ESI is only a fraction above its long-run average when its components are weighted according to their shares of GDP," Pantheon said, pointing to surveys from Markit, Lloyds and Deloitte that have all shown corporate confidence rising only slightly in December and remained at sub-par levels.

Pantheon sees CPI inflation as having peaked at 3.2% in November and expects it to begin to fall gradually over the coming months.