The British economy has suffered a “dramatic deterioration” in the four weeks since the UK voted to leave the EU, new figures on Friday (22 July) showed, prompting the country’s new Chancellor to warn he may have to “reset fiscal policy” in the autumn.
The shock vote to leave on 23 June created immediate political shockwaves – with the resignation of the prime minister, David Cameron, and his replacement with Theresa May – but only now are the longer-term economic consequences becoming discernible.
In trips to Berlin and Paris this week, May has successfully bought herself until early 2017 to trigger Article 50, beginning two years of negotiations to leave the bloc, whilst her and her government decide what kind of ‘Brexit’ economic model they are aiming towards.
A key survey of British business activity for July – the first full month since the referendum – saw the biggest drop since April 2009, and an overall contraction in private sector activity.
“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 Chris Williamson, chief economist at Markit.
The preliminary composite purchasing managers’ index (PMI) by the research Markit group sank to 47.7 points in July, down from 52.4 in June.
A reading under 50 indicates contraction in private sector activity.
British opposition Labour Party leader Jeremy Corbyn said on Thursday (21 July) that the result of last month’s vote to leave the European Union should be respected, putting him at odds with the lawmaker who is challenging him for his job.
The survey is regarded as a key early indicator of economic activity before official statistics are published.
Philip Hammond, the new Chancellor (finance minister), reacted by giving a clear signal he may do a U-turn on the tight fiscal policy of his predecessor George Osborne – who also lost his job in the reshuffle following Brexit.
Hammond, speaking on a trip to China just before the release of the PMI surveys, said, “Over the medium term we will have the opportunity with our Autumn (budget) statement … to reset fiscal policy if we deem it necessary.”
Hammond is attending a weekend meeting of finance ministers from the Group of 20 economies at which counterparts will be keen to hear how Britain can pull off a smooth exit from the EU while minimising the damage to the global economy.
The International Monetary Fund has already cut its forecast for global growth after Brexit threw “a spanner in the works”. It has slashed its UK growth forecast for 2017 by 0.9 percentage points to 1.3 percent.
Williamson said the PMI findings – manifesting themselves in order book cancellations, a lack of new orders, of the postponement or halting of projects – “was most commonly attributed in one way or another to Brexit.”
“Much of course depends on whether we see a further deterioration in August or if July represents a shock-induced nadir,” added Williamson.
“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 collapse in the British pound following the Brexit vote had meanwhile pushed up manufacturers’ costs.
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 uncertainty created by Brexit.
Brexit-supporting newspapers such as the Daily Mail and Daily Express have condemned much of the economic data as “doom-mongering”, much as they dubbed such warnings before the vote as “Project Fear.”
This week the Daily Express had a headline: “Britain BOOMS after EU vote: Ignore the doom-mongers…it’s good news all round.”
Michael Gove, a former Conservative Cabinet minister, and one of the most prominent Leave campaigners, famously said during the referendum campaign that the British people “had had enough of experts.”