Economy slow after Brexit brings recession warning

The UK economy has seen a 'dramatic deterioration' as it slumped at its fastest rate since the financial crisis in the wake of Britain's vote to leave the European Union, a report has said.

New Chancellor of the Exchequer Philip Hammond is keeping a close eye on how the Brexit vote affects the economy as he considers his Autumn Statement. Picture: AP

The closely watched Markit Flash UK Composite Output Index plummeted to its lowest level since April 2009, falling to 47.7 in July, compared to 52.4 in June. A reading above 50 indicates growth.

This sharp contraction was triggered by falling output and orders for the first time since the end of 2012, while business optimism in Britain’s powerhouse services sector hit a seven-and-a-half-year low.

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The data, collected between 12 and 21 July, provides a stark picture of the state of the economy following the Brexit vote, with City experts now warning that Britain could be heading for a recession. Sterling was down 0.2 per cent against the dollar at $1.318 after the report was published, while the pound also fell 0.3 per cent against the euro at e1.195 euro.

Chris Williamson, chief economist at Markit, said the update showed a “dramatic deterioration” in the UK economy and he expects gross domestic product to contract by 0.4 per cent in the third quarter.

“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.” He 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.”

A downturn in the services sector was “more marked” than in manufacturing, with services activity and new orders dropping at their quickest rate for seven years. But while output and new orders also came under pressure in the manufacturing sector, its new export business rose for the second straight month, boosted by the sharp drop in sterling after the Brexit vote.

Institute for Fiscal Studies director Paul Johnson said the report did not mean a recession was inevitable. He said: “It’s a useful piece of information, but one should be careful of over-interpreting one single piece of information.

“It certainly hit a trough during the 2009 recession in the way that you would expect it to do. It also went down a lot in the wake of the dot com crash, and indeed, after 9/11, and that didn’t presage recession.”