Britain’s Economy Weakens Quickly After Brexit Vote, May Lead to Increased Spending – Reuters

By Andy Bruce and Douglas Busvine

LONDON – Recent data indicates that Britain’s economy is experiencing a contraction, the most comprehensive survey of business confidence conducted since last month’s pivotal decision to exit the European Union has revealed. In response to this downturn, finance minister Philip Hammond announced plans to ease fiscal restrictions if the economic weakness persists.

The Bank of England has also signaled that a reduction in monetary policy may be warranted.

The preliminary Markit survey of purchasing managers, which includes spending decision-makers from 1,250 large firms, reported the most significant drop in its 20-year history. The findings suggest the economy could contract by 0.4 percent in the third quarter, a stark contrast to the 0.4 percent growth observed in the first quarter.

"July saw a dramatic deterioration in the economy," remarked Chris Williamson, Markit’s chief economist. "This downturn, which includes cancellations of orders, a decline in new orders, and the deferral or stoppage of projects, has frequently been attributed to Brexit."

This report, coming shortly after Prime Minister Theresa May established a new Conservative government, highlights the challenges she faces in sustaining market and investor confidence as she begins what are anticipated to be protracted and complex Brexit negotiations.

Hammond downplayed the significance of the purchasing manager surveys, suggesting they reflect sentiment rather than actual economic activity. However, he affirmed his commitment to support the economy, indicating that upcoming budget plans will take economic conditions into account. "The nature of this framework will depend on economic conditions at the time of the Autumn budget statement. The data we observe over the next three months will be vital in shaping our response," he said during a visit to China.

Hammond is participating in a weekend gathering of finance ministers from the Group of 20 economies, where global counterparts will be eager to learn how Britain plans to navigate a smooth exit from the EU while minimizing disruption to the global economy.

The International Monetary Fund has already revised its predictions for global growth downward, stating that Brexit has complicated matters significantly. It has reduced its UK growth forecast for 2017 by 0.9 percentage points to 1.3 percent.

The grim economic outlook contrasts sharply with the optimism exhibited by some pro-Brexit media outlets. One newspaper recently proclaimed a booming British economy post-referendum.

The Markit PMIs, which serve as an early indicator of gross domestic product performance, indicate that the UK economy, valued at £1.8 trillion, is shrinking more rapidly than it has since the global financial crisis.

Notably, the services sector—one of the few engines of British economic growth—has been particularly affected by Brexit, with a significant drop in orders and a decline in confidence.

A pressing concern for businesses is the future access Britain will have to the EU’s single market. While the UK seeks to restrict the free movement of workers, the EU has stated that such movement is a prerequisite for single market access.

The services sector’s PMI plummeted to 47.4 in July from 52.3 in June, marking the steepest decline since records began in 1996 and the lowest figure since March 2009, correlating with the global recession’s low point. Economists had anticipated only a moderate decrease to 49.2.

This evidence of a marked decline in business activity across many sectors of the UK economy could concern the Bank of England as it deliberates how forcefully to respond at its upcoming policy meeting to mitigate the impact of the referendum results.

In the currency market, the pound further depreciated, trading 1 percent lower at $1.3095, reaching new lows for the day, while British government bond prices increased. The pound’s post-referendum fall to its lowest value against the dollar since the mid-1980s has spurred a notable increase in manufacturing exports. However, this decline has simultaneously raised costs for energy and raw materials at the fastest rate in five years.

"This is the first substantial survey indicating the pace of economic activity, and the results are weak. Taken at face value, they suggest a period of contraction for the economy," stated Investec analyst Philip Shaw.

Economists indicated that Hammond’s proposed "reset" might resemble the fiscal policy framework established by his predecessor in 2010, which aimed to balance public finances within a five-year time frame while excluding investment spending and considering the current economic cycle.

Hammond could potentially initiate a looser fiscal policy at a time when it may be necessary, while still maintaining a responsible approach to public finances, according to Sam Hill, a senior UK economist at RBC Capital Markets.

The manufacturing PMI dropped to 49.1 from 52.1 in June, the lowest level since February 2013. The composite index, which merges services and manufacturing data, fell to 47.7 from 52.4, marking the weakest reading since April 2009.