Mon, Jul 25, 2016 - Page 7 News List

Brexit wreaks havoc on UK economy
as recession risk increases

The UK’s services gage has dropped to 47.4, as the PMI fell sharper than predicted, and pressure is on the Bank of England to respond

By Jill Ward  /  Bloomberg

illustration: Yusha

The UK’s decision to leave the EU inflicted an immediate blow on the economy as business activity shrank at its fastest pace since the last recession seven years ago.

In the weeks following Brexit, there was a “dramatic deterioration,” Markit Economics said in a one-time report published on Friday last week.

Services and manufacturing shrank and a gauge of the private-sector economy plunged to 47.7, well below the 50 level that divides expansion from contraction.

The slump is the strongest evidence yet that politics is propelling the world’s fifth-largest economy into recession. It intensifies pressure on the Bank of England to deliver fresh monetary stimulus and on the government to reverse austerity. The British pound dropped after the report was published, with Markit saying its latest readings put the economy on course to contract by 0.4 percent this quarter.

“July’s PMI [purchasing managers’ index] certainly points to more easing,” said Samuel Tombs, an economist at Pantheon Macroeconomics in London. “We’ve seen a variety of business measures fall to levels not seen since the financial crisis. Although consumer confidence might hold up for the next few months, businesses are putting the brakes on investment.”

A gauge of services, the biggest part of the economy, dropped to 47.4. The slide in the composite PMI was sharper than economists had predicted and was the biggest drop on record.

It is now at the lowest since April 2009, when the global financial crisis had helped push the UK into five straight quarters of contraction, and then-British prime minister Gordon Brown said an “international hurricane” was battering the world economy.

“The downturn, whether manifesting itself in order-book cancelations, a lack of new orders or the postponement or halting of projects, was most commonly attributed in one way or another to Brexit,” Markit chief economist Chris Williamson said.

The pound dropped 0.9 percent to US$1.3107 at 2:07pm London time on Friday. Markit collected the data between July 12 and Thursday last week. It released the survey — based on about 70 percent of usual replies — to provide clarity on the impact of the referendum.

The report raises questions on the impact on the global economy.

The IMF downgraded its global growth forecast this week and G20 officials, who met in China over the weekend, were planning to say they are capable of dealing with the economic fallout of Brexit.

For Bank of England Governor Mark Carney and fellow officials debating whether the UK economy needs more stimulus, a key question will be whether the signs of weakness persist or just reflect an initial post-referendum shock.

Williamson said the slump in the PMI “will provide a powerful argument for swift action.”

While most Bank of England Monetary Policy Committee members said that action is required at the next meeting, two of its nine officials — Martin Weale and Kristin Forbes — have said that they need further evidence of the impact Brexit is having.

Investors are now pricing in an 88 percent chance the Bank of England will lower its key interest rate from 0.5 percent at its announcement on Thursday next week.

Even with a weakening economy, the UK’s political circumstances do not favor a reversal of the vote. New British Prime Minister Theresa May has ruled out repeating the referendum, and has adopted a new catchphrase: “Brexit means Brexit.”

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