Business index shows UK economy shrinking fast after Brexit vote

Britain's economy appears to be shrinking at the fastest rate since the financial crisis in the wake of last month's Brexit vote, according to a business activity index that posted the biggest drop in its 20-year history.

An early edition of Markit's purchasing managers' indices (PMI) showed the services sector – one of the few drivers of British economic growth – has been hit especially hard by the vote to leave the European Union, with orders plunging and confidence crumbling.

The PMI for the services sector fell to 47.4 in July from 52.3 in June, the steepest drop since records began in 1996 and the worst reading since March 2009, around the low point of the global economic recession. Economists polled by Reuters had expected a much smaller fall, to 49.2.

The evidence of a sharp drop in business activity across a broad swathe of Britain’s economy may alarm the Bank of England, which is trying to decide how aggressively it needs to act to cushion the shock of the referendum vote.

"This is the first major survey showing the pace of activity through the economy and it is soft. Taken literally it would imply a period of contraction in the economy," Investec analyst Philip Shaw said. "It might be a little bit early to draw firm conclusions but it certainly looks as though the second half of the year will be weaker than the first."

Separate figures show that euro zone growth may be lower than previously expected, primarily due to the effects of Britain’s vote, the European Central Bank’s Survey of Professional Forecasters showed on Friday.

Growth is now seen at 1.4 per cent next year, below an earlier projection of 1.6 per cent, while the 2018 estimate was cut to 1.6 per cent from 1.7 per cent, the quarterly survey of 51 forecasters showed.

For 2016, the GDP growth projection was unchanged at 1.5 per cent.

The BoE’s own research, published on Wednesday along with some other surveys, had pointed to a big rise in uncertainty in the UK economy but a relatively limited initial drop in activity.

Markit’s figures are one-off “flash” versions of its monthly surveys. They are based on 85 per cent of the normal number of responses, collected from July 12th to July 21st to capture sentiment after the Brexit vote. Markit will update the figures early next month.

Markit said that if the PMIs stayed at these levels, they would be consistent with the economy shrinking at a quarterly pace of 0.4 per cent, a rate of decline not seen since the 2008-09 recession.

"July saw a dramatic deterioration in the economy," said Chris Williamson, Markit's chief economist. "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."

The manufacturing PMI fell to 49.1 from 52.1 in June, the lowest since February 2013.

The composite index, which combines services and manufacturing, slumped to 47.7 from 52.4, the weakest reading since April 2009.

– Reuters