The UK economy has suffered a ‘dramatic deterioration’, sliding at its fastest rate since the last financial crisis in the wake of Britain’s vote to leave the European Union, a survey showed on 22 July.
A ‘flash’ reading (estimate) of the composite purchasing manager’s index (PMI) compiled by data firm IHS Markit showed the index at its lowest level since April 2009. It fell to 47.7 in July, compared to 52.4 in June. A reading above 50 indicates growth.
The PMI is an indicator of the economic health of the manufacturing sector. It is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.
This report was based on a survey of purchasing executives at 600 manufacturing companies and more than 650 services firms collected between July 12 and 21.
Chris Williamson, chief economist at IHS Markit, said the update showed the UK economy is on course to contract by 0.4 percent in the third quarter.
He added: ‘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.’
Mr Williamson said: ‘At this level, the survey is signalling a 0.4 percent contraction of the economy in the third quarter, though much of course depends on whether we see a further deterioration in August or if July represents a shock-induced nadir.
A recession is technically defined as two consecutive quarters of negative growth, which shows the economy is shrinking.
Markit found the downturn in the services sector was more marked than in manufacturing, with services activity and new orders dropping at their quickest rate for seven years.
PMI fears prompt pound to plunge
The pound fell by around 1.5 percetn from its intraday high against the dollar after UK PMIs revealed a 'dramatic deterioration' in the UK economy following the referendum result.
"This is a troubling set of results"
BBC World Service economics correspondent Andrew Walker comments:
"The figures in PMI surveys are taken seriously by economists as early warning signs of what is in the pipeline. When there is a downturn, the PMIs generally tell the same story.
"So this is a troubling set of results. But it is just one month's worth. It is possible that this is a "shock-induced nadir", as the chief economist at the firm who conducted the survey put it, and that the economy will right itself in the coming months.
"In addition, the financial markets have stabilised and in some areas rebounded, in an adjustment after the vote that was described by the IMF as severe but generally orderly.
"That said, the survey results do increase the chances of some action from the Bank of England, perhaps an interest rate cut in August, or perhaps even some additional spending plans in the chancellor's Autumn Statement."