New report: Brexit leads to “dramatic deterioration” in economic activity

phillip hammond
Philip Hammond

Data from IHS Markit’s Purchasing Manager’s Index shows a fall to 47.7 in July, the lowest level since April in 2009.

Manufacturing and service sectors saw a drop in output and orders, however, exports have picked up as the pound has weakened.

The report surveyed more than 650 services companies, from sectors including transport, business services, computing and restaurants and is the first significant set of data measuring business reaction to the result of the UK referendum.

Chris Williamson, chief economist at IHS Markit, said the downturn has been “most commonly attributed in one way or another to ‘Brexit’.”

“Given the record slump in service sector business expectations, the suggestion is that there is further pain to come in the short-term at least.”

Mr Williamson added that the economy could contract by 0.4% in the third quarter of this year, but that would depend on whether the current slump continued.

“The only other times we have seen this index fall to these low levels, was the global financial crisis in 2008/9, the bursting of the dot com bubble, and the 1998 Asian financial crisis,” he told the BBC.

“The difference this time is that it is entirely home-grown, which suggest the impact could be greater on the UK economy than before.”

“This is exactly what most economists were saying would happen.”

The figures in PMI surveys are taken by economists to be early warning signs of what is to come. When there is a downturn, the PMIs generally tell the same story.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the figures provided the “first major evidence that the UK is entering a sharp downturn”.

Although he added that the “confidence shock from the Leave vote might wear off over the coming months”.

Neil Wilson, markets analyst at ETX Capital, said he thought the UK was “heading for a recession again”, and that the data would almost certainly prompt the Bank of England to roll out further stimulus.

The PMI figures come hours after the UK’s new chancellor, Philip Hammond, said he might “reset” Britain’s economic policy.

Mr Hammond said on Friday: “Over the medium term we will have the opportunity with our Autumn Statement, our regular late year fiscal event, to reset fiscal policy if we deem it necessary to do so in the light of the data that will emerge over the coming months.”

Although business confidence has dropped to an 18-month low, economic growth overall has lined up with pre-Brexit trends, and employment has risen.

President The European Central Bank (ECB) , Mario Draghi, has made optimistic comments, stating that Europe’s financial markets had “weathered” the uncertainty caused by the vote.

Europe Economics’ Andrew Lilico, who argued during the referendum campaign that leaving the EU would be beneficial for the UK in the long term, told the BBC the PMI data was “no surprise”, and that it “doesn’t tell us much about what Brexit’s longer term impact will be”.

Mr Lilico says he always expected a short term reaction, and those who voted to leave, “expected a short term slowdown too”.

The downturn, he added, was “associated with risks in the global economy,” as well as Brexit.

Share icon
Share this article: