Mixed signals for Brexit-bound UK economy: factories grow, consumers cautious

By David Milliken and Andy Bruce

LONDON (Reuters) - Britain's factories have started 2017 strongly but consumers are turning more cautious about borrowing to spend, according to data which suggested the economy will slow after defying the Brexit shock in 2016.

The pound's slump after June's vote to leave the European Union helped demand for British exports, but it is unlikely to outweigh the hit to households as the cost of imports rises.

The picture of Britain's economy given by a monthly survey of the manufacturing sector and separate Bank of England data on borrowing hinted at a slight shift in the drivers of the country's surprisingly strong growth since the referendum.

Despite a bigger-than-expected slip in February in its measure of manufacturing, Markit said the sector looked on track for one of its best performances of the past seven years with growth of 1.5 percent likely in the first three months of 2017.

Export order growth picked up after a dip in January - something likely to please finance minister Philip Hammond, who told lawmakers on Tuesday that he hoped stronger net trade and investment would compensate for weaker consumer demand in 2017.

That said, manufacturing only accounts for about 10 percent of the British economy - far less than the roughly two thirds of spending in the economy which is driven by consumers.

Markit said the real Brexit test had yet to come.

"The big question remains as to whether robust growth can be sustained or whether it will continue to wane in the coming months," Rob Dobson, an economist at IHS Markit, said.

The BoE's credit data added to recent signs that consumer demand is softening.

For the first time since mid-2012, year-on-year growth in unsecured consumer borrowing fell for two months in a row. The rise in borrowing in the three months to January, while still strong at nearly 10 percent, was its weakest in over a year.

BoE Governor Mark Carney said last month he was watching to see if consumers kept up their borrowing to bridge the gap between rising inflation and sluggish growth in their wages, or instead reined in their spending.

The BoE has shown it is in no rush to raise record low interest rates as it waits to see how the economy copes with uncertainty about Brexit.

The housing market has shown fewer signs of a slowdown. The BoE said mortgage approvals - a gauge of future activity - rose to an 11-month high in January and mortgage lender Nationwide reported an unexpected pick-up in price growth, though it still expected growth to slow to 2 percent this year.

(Editing by William Schomberg/Jeremy Gaunt)