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UK Faces Severe Deterioration After Shock Europe Exit
World Economy

UK Faces Severe Deterioration After Shock Europe Exit

Britain’s economy was battered by the Brexit vote last month and faced a “dramatic deterioration” in activity as orders dried up and business investments were canned, key data showed Friday.
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, AFP reported.
Private sector business activity, as measured by research group Markit’s Purchasing Managers Index, 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 Chancellor of the Exchequer Philip Hammond said. “Our job is to try and restore as much certainty as we can and as quickly as we can.”
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.

Sharp Contraction
“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 signaled a 0.4% 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 7½-year low.
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 last week—and blamed Brexit.

Opportunity to Reboot
After years of sitting on its hands, the Bank of England will swing back into action next month with measures to nurse the economy through the post-Brexit period. Interest rates will be cut from their already historic low of 0.5%. The bank is considering pumping more electronic money into the economy and could ease credit conditions.
The treasury is also gearing up to provide stimulus measures. Now that George Osborne’s plan to balance the budget by the end of parliament has been ditched, there is scope for Philip Hammond to be more creative in his autumn statement later this year. He has already dropped the broadest of hints that he will seize this opportunity.
One benefit of Brexit is that it allows the economy to be rebooted. That is true after any severe economic shock, which certainly applies to the decision to leave the EU. The last time UK policymakers had the chance to implement root and branch cures to the economy’s structural weaknesses was during the financial and economic crisis of 2008-09. Instead they bottled it, relying almost wholly on the Bank of England to support activity through interest rate cuts and the money-creation program known as quantitative easing.

 

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