BoE Plans to Cut Rates Amid Survey Indicating Sharpest UK Downturn Since 2009, According to Reuters

By David Milliken

London – The British economy is experiencing its most rapid contraction since the financial crisis in the wake of last month’s Brexit vote, making a rate cut by the Bank of England (BoE) on Thursday a highly expected outcome, according to a significant business survey.

Financial data company Markit reported that its monthly all-sector Purchasing Managers’ Index (PMI) showed the sharpest month-on-month decline on record, with notable reductions in activity across private-sector services, manufacturing, and construction sectors.

Chris Williamson, chief economist at Markit, stated, "The unprecedented month-on-month drop in the all-sector index has undoubtedly increased the chances of the UK sliding into at least a mild recession."

According to data released on Wednesday, which aligns with earlier estimates, the UK economy is projected to shrink by 0.4 percent in the three months leading up to September—marking a decline that hasn’t occurred since early 2009, coinciding with the last interest rate cut by the BoE.

Companies have frequently reported that the result of the EU referendum has adversely affected new business initiatives, following the vote in favor of leaving the European Union on June 23.

Additionally, Britain’s National Institute of Economic and Social Research anticipated a 0.2 percent contraction from June to September, estimating a 50 percent likelihood of recession by the end of next year.

It remains unclear whether the reading from July reflects an immediate reaction to June’s vote or signals the beginning of a more pronounced downturn. Various other surveys indicate significant decreases in business and consumer confidence; however, there is still no official output data available.

One of Britain’s largest clothing retailers noted an increase in sales during its second quarter and indicated that the EU vote has not yet significantly impacted demand, although the depreciation of the pound may elevate costs, which could be passed onto consumers.

As for interest rates, nearly all economists expect the BoE to lower rates by at least 0.25 percentage points to a historic low of 0.25 percent on Thursday. However, there is more division regarding the potential reintroduction of its quantitative easing program involving government bond purchases.

Investec economist Philip Shaw expressed that while restarting quantitative easing is appealing, the channels through which it operates may have limited effectiveness.

The National Institute of Economic and Social Research does not foresee the current slowdown reaching the depths of the global financial crisis, characterized as Britain’s worst recession since the 1930s. Markit also indicated considerable uncertainty regarding the severity of any downturn.

PMIs from the eurozone have reported a slight uptick in growth, while Markit stated it is too soon to determine if the PMIs will remain as weak as they currently are. Confidence among service sector firms, a critical component of the UK economy, has declined to its lowest level since February 2009.

Williamson suggested that "a quarter-point cut in interest rates seems to be a foregone conclusion," though he noted there is significantly more uncertainty surrounding the nature and extent of any additional non-standard stimulus measures.

Prospective measures may include incentives for banks to lend at the lowest rates on record, possible purchases of private-sector assets such as corporate bonds, along with increased government debt purchasing through newly created central bank assets.

The BoE’s chief economist has indicated a willingness to adopt aggressive strategies to address weak growth, though some may prefer to await further data or observe if the government announces additional spending or tax cuts in the fall.

July’s PMI for the services sector remained unchanged from the preliminary estimate of 47.4, down from 52.3 in June, and the lowest figure since March 2009. The all-sector PMI recorded a slight decline, registering at 47.3—the lowest since April 2009—due to disappointing results from the construction sector PMI. The drop from 51.9 in June marks the steepest decline since the survey’s inception in 1998.