UK economic sentiment surges to 18-month high but inflation a major threat

UK economic sentiment in March rose to its highest level in 18 months, with business confidence improving in the services, retail and construction sectors, while remaining high in industry.

The European Commission’s Economic Sentiment Index for the UK picked up to 110.2 in March, the most since September 2015, from 109.4 last month.

The index's based level of 100 represents the average from 1990 to the present.

Data from the EC showed the euro area ESI dipped slightly in March as the readings for France and Spain retreated, although for the first quarter as a whole it pointed to a strong growth spurt.

Economists pointed out that the ESI generally overstates the economy-wide level of confidence in the UK, because the industrial confidence indicator has a 40% weight in the ESI, even though the sector accounts for just 15% of British GDP.

Even so, a version of the ESI from Pantheon Macroeconomics, which re-weights its components according to the composition of the UK economy, also crept above its long-run average and it is consistent with GDP growth remaining "brisk" in Q1.

"Sharp price rises, however, threaten to choke off the recovery," warned Pantheon economist Sam Tombs.

"The net balance of retailers planning to increase prices over the next three months rose to 62.9—its highest level since January 2011—from 52.0 in February. Larger-than-usual proportion of services, construction and industrial firms also plan to raise prices in Q2."