UK economy shrank in July as Brexit vote hit sentiment

Markit chief economist Chris Williamson attributed the fall to the vote in the UK to pull out of the European Union. Photo: PA

Colm Kelpie

July 23 2016 02:30 AM

The UK economy is shrinking at a pace not seen since early 2009, according to one of the broadest gauges of business activity since the Brexit vote.

Output and new orders both fell for the first time since the end of 2012, while optimism among companies slumped to a seven-year low, according to the flash purchasing managers' index compiled by financial information firm Markit.

Markit chief economist Chris Williamson attributed the fall to the vote in the UK to pull out of the European Union.

"July saw a dramatic deterioration in the economy, with business activity slumping at the fastest race since the height of the financial crisis in early 2009," Mr Williamson said.

"The one ray of light was an improvement in manufacturing export growth to the best for two years as the weak pound helped drive overseas sales, though producers also suffered the flip side of a weak currency as import prices spiked higher."

Businesses in Ireland fear a shrinking economy in the UK will have a knock-on effect here.

The growth outlook for the Irish economy has already been downgraded by a number of organisations including Deutsche Bank and Cantor Fitzgerald.

The Central Bank has also been revising its own forecasts, and will publish updated projections next week in its latest economic commentary.

Bank of Ireland yesterday said it had downgraded Irish growth for this year to 4.3pc from 5pc, and next year to 3pc from 4pc.

"The combination of a weaker pound, increased uncertainty and slower UK growth is expected to dampen Irish exports, and also weigh on confidence," said Dr Loretta O'Sullivan, group chief economist. "At the same time, growth in our other trading partners and previous competitiveness gains should provide some support," Dr O'Sullivan said.

"At home, the domestic economy is set to benefit from further investment, sustained consumer spending and an improving labour market.

"The unemployment rate is now at a seven-year low and, with employment growth expected to continue over the forecast horizon, could fall below 7pc by the end of next year."

The flash, or preliminary, Markit survey of purchasing managers - executives who make spending decisions at 1,250 big firms - fell by the most in its 20-year history.

It was consistent with an economy contracting 0.4pc in the third quarter, contrasting with an actual reading of plus 0.4pc in the first quarter.

The readout, little more than a week after UK Prime Minister Theresa May formed a new Conservative government, indicates the challenge she faces to maintain market and investor confidence as she embarks on what promise to be long and difficult Brexit talks.

UK Chancellor Philip Hammond played down the purchasing manager surveys as a measure of sentiment, not of "hard activity", but also said he would act to support the economy when he announces his budget plans later in the year.

"Exactly what that framework looks like will depend on the state of the economy at the time of the autumn (budget) statement," he told Sky News. (Additional reporting Reuters)