Recession fears after slump in economic activity

UK economic activity has tumbled at the fastest pace since the depths of the last recession after the Brexit vote, with sharp contractions in both the services and manufacturing sectors.

Fears the UK economy could be headed back into recession were fuelled by these grim survey findings, published yesterday by the Chartered Institute of Procurement & Supply.

The survey hit the embattled pound and boosted the UK stock market by fuelling expectations the Bank of England would have to cut base rates from their record low of 0.5 per cent next month to try to combat the economic weakness arising from the Brexit vote.

Combined UK services and manufacturing output has tumbled this month at the fastest rate since April 2009.

The survey, conducted between July 12 and 21, also shows a record drop in services companies’ future business expectations. It reveals drops in new orders and employment in manufacturing and services.

The construction sector, which appears to have been hit hard by the UK electorate’s vote on June 23 to leave the European Union, is not included in CIPS’s initial “flash” survey results.

Howard Archer, chief UK economist at consultancy IHS Global Insight, described CIPS’s survey findings as “truly horrible”.

The business activity index for the services sector tumbled from 52.3 in June to 47.4 in July on a seasonallyadjusted basis, plunging well below the level of 50 deemed to separate expansion from contraction to signal the sharpest fall in output since March 2009. The drop in the

index was the sharpest since comparable records began two decades ago.

The purchasing managers’ index for manufacturing dropped from 52.1 to 49.1 – signalling the sharpest contraction of activity for nearly three-and-a-half years.

The survey showed manufacturers’ export growth picked up to the fastest pace in nearly two years because of the pound’s tumble, but CIPS said it was not clear whether such opportunities would materialise in the long term given the “subdued” global economy. It noted sterling weakness had raised manufacturers’ input costs sharply.

Chris Williamson, chief economist at CIPS survey compiler Markit, said: “July saw a dramatic deterioration in the economy, with business activity slumping at the fastest rate since the height of the global financial crisis in early 2009. The downturn... was most commonly attributed to Brexit.”

He added: “The survey is signalling a 0.4 per cent contraction of the economy in the third quarter, though much depends on whether we see a further deterioration in August or if July represents a shock-induced nadir. 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 Archer said: “[The] survey suggests third-quarter contraction is a very real danger. Whether it starts in the third or fourth quarter, we suspect that the UK is headed for mild recession.”

Sterling was trading at $1.3091 at 5pm yesterday in London, down 1.25 cents on its Thursday close. The euro was up nearly 0.5p at 83.87p.