Recession warning over ‘dramatic’ slump in post-Brexit economy

The contraction was triggered by the first fall in output and orders since 2012
The contraction was triggered by the first fall in output and orders since 2012

The UK economy has slumped at its fastest rate since the financial crisis in the wake of Britain’s vote to leave the European Union, a report said.

The closely-watched Markit Flash UK Composite Output Index plummeted to its lowest level since April 2009, falling to 47.7 in July, compared to 52.4 in June. A reading above 50 indicates growth.

The sharp contraction was triggered by falling output and orders for the first time since the end of 2012, while business optimism in Britain’s powerhouse services sector hit a seven-and-a-half-year low.

The data, collected between July 12 and 21, provides a stark picture of the state of the economy following the Brexit vote, with City experts now warning that Britain could be heading for a recession.

Sterling was down 0.2% against the dollar at 1.318 US dollars after the report was published, while the pound also fell 0.3% against the euro at 1.195 euro.

Chris Williamson, chief economist at Markit, said the update showed a “dramatic deterioration” in the UK economy and expects gross domestic product (GDP) to contract by 0.4% in the third quarter.

“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.”

He added: “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.”

The study found that its flash UK services PMI (purchasing managers’ index) hit an 88-month low of 47.4 this month, compared to 52.3 in June.

The flash UK manufacturing PMI was also in the doldrums, slipping to a 41-month low of 49.1 in July, after a reading of 52.1 the month before.

The flash UK manufacturing PMI output index also dropped from 52.9 to 49.1 over the period.

The report said 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.

But while output and new orders also came under pressure in the manufacturing sector, its new export business rose for the second straight month, boosted in part by the sharp drop in sterling following the Brexit vote.

The update comes after the Bank of England said on Wednesday that business uncertainty had ‘’risen markedly’’ since the referendum result - but there was ‘’no clear evidence’’ of a sharp economic slowdown.