A flash Purchasing Managers Index (PMI) conducted by research group Markit shows the UK economy has seen a steep drop in output and new orders in the weeks following the EU referendum, pushing outlook optimism from service providers to seven-year lows.
The PMI, which was produced using data collected between July 12 to July 21 for the month of July, fell to 47.7, its lowest reading since April 2009, when the global financial crisis pushed the country into recession.
The index was 52.4 in June and a reading below 50 indicates activity is shrinking.
“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,” says chief economist at Markit, Chris Williamson.
The index, which looks at output and new orders in manufacturing and services, showed drops across the board for both categories in both sectors.
“The Composite Output and the Composite New Orders indices fell by 4.7 and 6.8 points respectively since June, the steepest drops registered in the series histories,” says IHS Markit.
“The 10.4 point decline in the Services Business Expectations Index was also the largest on record.”
A weaker currency saw a steep rise in manufacturers’ input prices due to higher import costs pushing purchase price inflation to a five-year record and the acceleration being among the steepest in the survey history.
On the job front, employment in the services sector fell for the first time since December 2012, while the manufacturers sector reported job cuts for the seventh month in a row.
Cost caution at manufacturers was also reflected in the steepest reduction in purchasing activity since March 2013 and further depletion of stock holdings.
Meanwhile, weaker demand and depletion of backlogs of work in both sectors suggest further job losses may occur in coming months, warned the market insights company.
“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,” says 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.”
“At this level, the survey is signalling a 0.4% contraction of the economy in the third quarter, though much of course 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.”
The only positive out of the survey was an increase in new export business for the second month in a row and the greatest for almost two years. This was mainly linked to the sharp drop in the sterling exchange rate.
“There is a glimmer of positivity with the new exchange rate encouraging a rise in export orders,” says CEO of the Chartered Institute of Procurement & Supply (CIPS) David Noble.
“With a subdued global economy, it is not yet clear whether these opportunities will materialise in the long term. With optimism in the UK’s service sector at a seven-and-a-half year low, policymakers must take swift action to stop further decline amid political upheaval.”
Meanwhile, similar flash PMIs for France and Germany both recorded increases. The French index was up to 50 from 49.6 in June, while Germany climbed to 55.3 from 54.4. The German index reached its highest level so far this year with both manufacturers and service providers reporting stronger expansions.