Is a Recession Looming in Britain? Factories Slow Down and Business Confidence Declines – Reuters

By Ana Nicolaci da Costa

LONDON (Reuters) – British manufacturing experienced its most significant decline in over three years during July, as business confidence plummeted in the aftermath of the Brexit vote, signaling an increased likelihood of an impending recession.

This development is likely to prompt the Bank of England to lower interest rates in the coming week.

A notable drop in output and new orders led to a key index of factory purchasing managers falling to its lowest level since February 2013, further indicating that the decision to exit the European Union is negatively impacting the economy.

The value of the pound fell to a three-week low against the euro following the manufacturing survey results.

British accountants reported a sharp decline in confidence immediately after the EU vote. Additionally, the Confederation of British Industry stated that companies anticipate economic growth to nearly stall in the next three months.

These factors support the case for the Bank of England’s first rate reduction since 2009, but they also underscore the challenges posed by the pound’s depreciation since the June 23 vote, which is placing upward pressure on inflation.

“The steep drop in the total orders balance indicates that the benefits from a weaker pound are insufficient to compensate for the downturn in domestic demand,” said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

He added, “The rise in the prices charged balance to its highest level in nearly two years shows that the Monetary Policy Committee cannot afford to overlook the inflation outlook when considering policy adjustments this week.”

Inflation remains low, however.

The Markit/CIPS UK manufacturing purchasing managers’ index (PMI) decreased to 48.2 in July from 52.4 in June—below the initial flash reading of 49.1 and marking its lowest point since February 2013.

Both output and new orders fell below the growth threshold of 50 for the first time since early 2013, attributed to weakened market conditions domestically and uncertainties surrounding the EU referendum.

The output index dropped to 47.8 in July from 53.6 in June, its lowest since October 2012. Meanwhile, new orders, which had seen strong growth in June, recorded their most significant decline since 1998.

An economic analysis conducted by Barclays indicated that the purchasing manager survey pointed toward a recession, projecting a contraction of 0.4 percent quarter-on-quarter by the end of September, followed by a further decline of 0.3 percent in the fourth quarter.

RATE CUT COMING

Almost all economists surveyed expect the Bank of England to implement a minimum 25 basis point cut on Thursday, although opinions differ on whether the Bank will reinstate its bond-buying program.

Average purchase prices increased at their highest rate in five years, with businesses attributing the rise to elevated commodity costs and increased import prices due to the weaker currency. Output price inflation also reached its highest level in nearly two years.

The anticipated boost to exports from a weakened pound was less pronounced than expected, leading to a slowdown in new export order growth after a peak in June.

Historically, during the 2008 financial crisis, a considerable decline in the pound saw inflation remain above the Bank of England’s 2 percent target for an extended period, while export growth was limited.

In June, however, inflation was significantly below target at just 0.5 percent, with few recent indications that individual price shocks are becoming entrenched in long-term inflation trends.

Since the Brexit vote, there has been a lack of official data accurately reflecting its impact on economic output.

Nonetheless, consumer confidence appears to be faltering, and earlier “flash” PMI surveys suggested the possibility of a quarterly economic contraction of 0.4 percent.

British finance minister Philip Hammond has played down the implications of the flash PMI numbers, characterizing them as sentiment indicators rather than reflections of actual economic activity.