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

LONDON – Britain’s economy is shrinking at its steepest pace since the global financial crisis in early 2009 as a result of the vote to leave the European Union, a survey indicated Friday.

The so-called purchasing managers’ index, a gauge of business activity conducted by IHS Markit, fell to 47.7 points in July from 52.4 in June. The figures are on a 100-point scale, with the 50 threshold separating growth from contraction.

The survey is one of the first official measures of how the economy responded to the vote, and is based on questionnaires sent to executives in over 600 companies between July 12 and 21.

“July saw a dramatic deterioration in the economy, with business activity slumping at the fastest rate since the height of the global financial crisis in early-2009,” said Chris Williamson, chief economist at Markit. “The downturn, whether manifesting itself in order book cancellations, a lack of new orders or the postponement or halting of projects, was most commonly attributed in one way or another to ‘Brexit.'”

A departure from the EU could mean companies based in Britain are cut off from the bloc’s single market, which guarantees no tariffs on trade and the free movement of workers and money. The uncertainty over Britain’s trade relations, which will take years to renegotiate, is causing companies to hold back investment and hiring or even to make cuts.

The weeks of political uncertainty, with the prime minister resigning after the vote and the main parties in disarray, also hurt confidence.

The Markit survey found that both business output and new orders fell in July for the first time since the end of 2012. Their drop from the previous month was the steepest in the survey’s history.

The measure of service providers’ optimism about the coming 12 months slumped to a seven-and-a-half year low. Manufacturers reported job cuts.

The report noted there wasn’t an increase in business costs, which some are fearing as the plunge in the pound since the vote will make fuel, raw materials and imports more expensive. Those rises were offset in part by subdued wage inflation.

Michael Hewson, analyst at CMC Markets, said the survey findings were worse than expected.

“The big and important question now is whether this slowdown heralds a more permanent economic condition, or whether in the final days of July, we get a pickup in activity now that we have a more stable political environment and the Brexit fog has started to clear a little.”

Britain’s new Treasury chief, Philip Hammond, said he would be prepared to use the next budget update, called the Autumn Statement, to help the economy in the event of a downturn.

“We will have the opportunity with our Autumn Statements … to reset fiscal policy if we deem it necessary to do so in light of the data that will emerge over the coming months,” he said on a visit to Beijing ahead of a meeting of G-20 finance ministers in Chengdu.

The findings will cement expectations that the Bank of England will provide more monetary stimulus to the economy at its next meeting in August, experts say. The pound sharply fell on the prospect, to $1.3090 from $1.3280 earlier in the day.

The equivalent survey for the 19-country eurozone showed the currency bloc was resilient in the face of the uncertainties unleashed by U.K. vote.

Markit’s index for the eurozone dropped to 52.9 points from 53.1 in June. While that was an 18-month low, the drop was relatively small and suggested continued economic growth of around 1.5 per cent annually.