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The grim news — the first indication of economic contraction since Britain’s shock EU exit vote — was revealed at the end of a week in which Prime Minister Theresa May toured France and Germany to soothe Brexit jitters.
Private sector business activity, as measured by research group Markit’s Purchasing Managers Index (PMI), sank in July to 47.7 points.
It was the lowest level since April 2009 following the global financial crisis, and sparked predictions from some quarters of a painful recession.
The preliminary reading compared with 52.4 in June and crucially took the PMI below the boom-or-bust 50 points barrier that signals contraction, Markit said.
“Our economy has suffered a shock from the referendum vote… that has had an impact on confidence,” Britain’s new finance minister Philip Hammond said in an interview broadcast on Sky News.
“Our job is to try and restore as much certainty as we can as quickly as we can,” he said.
Business activity slumps
The survey — regarded as a key early indicator of economic activity before official statistics are published — comes after Britons voted to leave the European Union in a crunch referendum on June 23.
“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,” said Markit chief economist Chris Williamson.
“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.”
Markit said the survey signalled a 0.4-percent contraction in the British economy in the third quarter or three months to September.
“Much of course depends on whether we see a further deterioration in August or if July represents a shock-induced nadir,” Williamson 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 sharp contraction was triggered by falling output and orders for the first time since the end of 2012, while business optimism in the services sector hit a seven-and-a-half-year low.
The collapse in the British pound following the Brexit vote meanwhile pushed up manufacturers’ costs.
“The downside of the exchange rate was a steep rise in manufacturers’ input prices, mainly due to higher import costs,” it said.
The data was published after the International Monetary Fund slashed its global and British economic growth forecasts for 2016 and 2017 earlier this week — and blamed Brexit.
Hammon heads to China
Hammond met Chinese business leaders and officials later on Friday to drum up support for the nation’s Brexit-hit economy ahead of talks with G20 counterparts in Chengdu.
The British Treasury said Hammond was seeking to reassure Chinese investors and politicians that “Britain is open for business” despite voting last month to leave the 28-nation EU bloc.
The finance chief had declared earlier this week that the Bank of England (BoE) must respond to the economic “shock” arising from Brexit.
Williamson said that the new PMI data could persuade policymakers to act.
“With policymakers waiting to see hard data on the state of the economy before considering more stimulus, the slump in the PMI will provide a powerful argument for swift action,” he said.
The BoE kept its key interest rate at 0.50 percent last week, confounding expectations of a reduction — but flagged a possible August cut in response to Brexit.
Policymakers also signalled that the exact size and nature of any stimulatory measures would be determined at next month’s monetary policy gathering, due on August 4.
“The readings suggest we are heading for a recession again and it is almost certain the Bank of England will pull the trigger on aggressive stimulus to boost aggregate demand,” said ETX Capital analyst Neil Wilson.
The technical definition of a recession is two quarters or more of economic contraction.