After vote, UK economy shrinking at fastest pace since ’09

The British economy has suffered a “dramatic deterioration” in the four weeks since the United Kingdom voted to leave the European Union, new figures on Friday (22 July) showed, prompting the country’s new Chancellor to warn he may have to “reset fiscal policy” in the autumn.

The composite output index, which includes both the services and manufacturing sectors, fell to 47.7 in July, well below the 50 mark above which indicates expansion and an 87-month low, falling from 52.4 in June.

The index ranked at 52.4 in June. Economists had forecast a reading of 52 for July.

The PMI flash estimate for July suggested that the United Kingdom was heading for a contraction of 0.4% in the third quarter of 2016, the first fall in gross domestic product (GDP) since 2012.

Figures from the closely-watched Markit purchasing managers’ index (PMI) indicated the economy had been plunged into its steepest downturn since the height of the financial crisis in early 2009.

According to Markit, output and new orders fell in both the manufacturing and services sector during the month, but the downturn was more marked in services, where both measures fell at the quickest rates in over seven years.

Even so, economists are watching for any signs that French exporters are suffering from turmoil in the neighboring United Kingdom and, more recently, whether the terrorist attack that killed 84 people this month in Nice might hurt the tourist industry, which generates about 7 percent of gross domestic product.

“Weaker sterling has driven a steep rise in input prices for manufacturers but there is a glimmer of positivity with the new exchange rate encouraging a rise in export orders”.

Still, if maintained at this level, the composite PMI points to third-quarter economic growth of 0.3 percent, Markit said, in-line with a Reuters poll published on Wednesday but a sharp slowdown from the 0.6 percent growth seen at the start of the year.

“A number of firms linked this to ongoing uncertainty pre- and post-EU referendum, with reports especially prevalent among service providers”, added Markit in a statement.

Lower rates of business activity also hit the manufacturing and service sectors, with a sizeable amount of companies in the survey pointing the finger at “Brexit” as the reason for the downfall. “However, with a subdued global economy, it is not yet clear whether these opportunities will materialise in the long term”. In Germany, PMI respondents reported the fastest rate of output growth for this year, with large employment growth, and services growth revived from June’s 13- month low, and factories’ production levels was the largest improvement since April 2014.

The services sector, however, did not witness an uptick in costs as experienced by the manufacturing sector amid the decline in the value of the pound.

It asked them: “Is the level of business activity at your company higher, the same or lower than one month ago?”

Brexit-supporting newspapers such as the Daily Mail and Daily Express have condemned much of the economic data as “doom-mongering”, much as they dubbed such warnings before the vote as “Project Fear”.