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    Shock Drop In Key Business Index Shows UK Economy Shrinking Fast Post-Brexit

    A key UK economic index has fallen to its lowest level in seven years following the vote to leave the EU – suggesting the country may be heading for recession.

    Anthony Wallace / AFP / Getty Images

    The UK may be heading for recession, according to new data published today based on surveys of directors at some of the UK's largest companies.

    The purchasing managers index (PMI) – a measure of orders, output, exports, and more – is designed to provide a "snapshot" of how businesses are performing. Though not an official set of statistics, the index is well-respected and tends to closely track what happens to GDP, the official measure of how the economy is performing.

    The UK's PMI fell from 52.4 in June to 47.7 in July, the lowest level recorded since April 2009, when the global financial crisis engulfed the UK economy.

    Any measure on the index below 50 signifies the economy is contracting, meaning the month-on-month change suggests the UK went from modest growth to a slump in the space of a month.

    Markit

    The data suggests the UK's GDP may fall by about 0.4% in the third quarter of 2016. Falling GDP for two quarters in a row is the official definition of a recession.

    Markit, the company that produces the PMI, also said several of the key measures that make up their headline figures had shown record month-on-month drops, including measures of output and new orders. The measure of expectations of future business for service companies – a key UK sector – dropped by more than 10 points in one month.

    “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's 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’."

    Williamson added it was likely that July's figures would not mark the low point of the post-Brexit fallout. "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," he said.

    What does this mean?

    The significance of the PMI is that it's a longstanding and high-quality dataset governments, central banks, and markets all pay attention to, especially because it's published much more quickly than official GDP statistics.

    A big reason PMI is watched closely is as a signal for where official statistics are headed – a little like the way the Golden Globes are used to divine who might be in line for an Oscar later in the awards season.

    The data is collected based on survey information from directors at 650 of the UK's largest companies. Markit collects similar figures across 30 countries.

    Gavin Kelly, who was deputy chief of staff for Gordon Brown amid the financial crisis, reflected on Twitter about the moment he saw the 2009 figures while working at Number 10:

    Recall all too well PMI collapsing in 08/09. V different context today, but there's no +ve gloss on these figures. https://t.co/ckm4Nhcm4q

    Twitter

    The new figures also seem to scotch any idea that Europe would be hit as hard by Brexit as the UK, an idea used to suggest the UK would have a good negotiating position for trade deals as European countries would need a deal as much as the UK would.

    The Italian journalist Ferdinando Giugliano tweeted the eurozone's PMI versus the UK's with a sardonic rejoinder.

    "#Brexit will hurt them more than it will hurt us". EZ PMI composite 52.9 UK PMI composite 47.7 Yep.

    Twitter

    Calm down everyone: purchasing managers are self-evidently experts. A man down the pub tells me there is no problem with the economy #Brexit

    Twitter

    The worse-than-expected statistics make it even likelier that the Bank of England will cut interest rates when its monetary policy committee next meets in early August, analysts said.

    “Today’s super-weak PMI is the first hard evidence that Brexit has already had an impact on the UK economy," analyst Neil Wilson of ETX Capital said in a note.

    "There was a sharp fall in activity in July and it now looks like the Bank of England has the data it needs to launch fresh easing at its next meeting at the start of
    August.

    "The readings suggest we are heading for a recession again and it is almost certain the BoE will pull the trigger on aggressive stimulus to boost aggregate demand."

    James Ball is a special correspondent for BuzzFeed News and is based in London. PGP: <a href="http://pgp.mit.edu/pks/lookup?op=get&amp;search=0x05A89521181EE8F1" target="_blank">here</a>

    Contact James Ball at James.Ball@buzzfeed.com.

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