The Economy after Brexit

Those who claimed that a Brexit vote was unlikely to cause the British economy some hardships in the short and medium term are now in the throes of reassessing their earlier predictions.

The UK economy has in fact suffered a dramatic deterioration in the wake of the Brexit vote with a closely-watched survey showing activity drop in July at the fastest pace since the financial crisis.

Sterling fell against the dollar and euro after Markit’s ‘Flash’ Survey of private sector businesses suggested the UK economy was on course to contract by 0.4% in the third quarter putting the UK on course for a recession with negative growth to be repeated in the final quarter of the year.

The first poll of its type since the Referendum result in late June showed the biggest contraction in Britain’s dominant services on record. Optimism about future growth also fell at the fastest pace since records began in 1996.

The services purchasing managers’ index (PMI) dropped to 47.4 in July from 52.3 in June, well below the 50 level that divides growth from contraction. This represents the slowest level since April 2009. Economists had expected a reading of 48.8.

The manufacturing PMI dropped to 48.7 from 52.1 in June. While this represents a 41-month low, the data also shows the sector was reaping the benefits of a weaker pound. New export business rose for the second straight month and for the greatest extent for almost two years.

‘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 2009,’ said Chris Williamson, chief economist at Markit.

‘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 its readings signalled the economy would shrink by 0.4% in the next quarter. This would be the biggest contraction since the first quarter of 2009 when it contracted by 1.6%.

The pound fell by as much as 1.6% against the dollar to $1.3080 and 1.4% against euro to €1.2047after the data was released.

On a trip to China last week the chancellor, Phillip Hammond, signalled that the government was prepared to borrow more to boost the economy.

Let’s hope that the new chancellor will, if need be, cut taxes including the rate of VAT to stimulate the economy and give comfort to people whilst Britain is adjusting to its new role outside the EU.

Confidence is vital in troubled times, especially when the world is undergoing a spate of violence and the kind of instability that can cause havoc on a scale which we have seldom experienced before.

 

 

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