Aug 3 Britain’s economy is shrinking at its fastest rate since the 2008-09 financial crisis, making a Bank of England rate cut on Thursday “a foregone conclusion”, the publishers of a closely watched business survey said.
Financial data company Markit said the full version of its monthly Purchasing Managers’ Index (PMI) on Wednesday showed a sharp hit to business activity from June’s European Union vote, just as a one-off preliminary PMI did two weeks ago.
Chris Williamson, Markit’s chief economist, said the numbers pointed to Britain’s economy shrinking by 0.4 percent in the three months to September, a rate not seen since early 2009 when the BoE last cut interest rates.
“The unprecedented month-on-month drop in the all-sector index has undoubtedly increased the chances of the UK sliding into at least a mild recession,” he said.
Economists polled by Reuters last month saw a 60 percent chance of recession in the wake of June 23’s vote to leave the EU, and Britain’s National Institute of Economic and Social Research (NIESR) gave only slightly longer odds when it cut its growth forecast earlier on Wednesday.
NIESR has said it does not expect the slowdown to match that seen during the global financial crisis — Britain’s worst recession since at least the 1930s — and Markit said there is “substantial uncertainty about the extent of any downturn”.
Almost all economists expect the BoE to reduce rates by at least a quarter percentage point to 0.25 percent on Thursday, but they are more split on whether it will restart its quantitative easing programme of government bond purchases.
While surveys such as the PMI measure firms’ judgement of how their production, hiring, and general activity compares with a month earlier, there have been no official data on how Britain’s economic output has changed.
Markit said it was too early to know if the PMIs would stay as weak as they are now, but added that confidence about the year ahead was at its lowest ebb since February 2009 among firms in the services sector, the engine of the British economy.
“A quarter-point cut in interest rates therefore seems to be a foregone conclusion … though the extent and nature of other non-standard stimulus measures remains a far greater source of uncertainty,” Williamson said.
Measures to tempt banks to lend at record-low rates, as well as possible purchases of private-sector assets such as corporate bonds, are potentially on the table alongside buying more government debt with freshly created central bank money.
The BoE’s chief economist said he would be willing to use “a sledgehammer to crack a nut” in tackling weak growth, but others may prefer to wait for more data and see if the government unveils an autumn package of extra spending or tax cuts.
July’s PMI for the services sector was unchanged from the ‘flash’ estimate of 47.4 released on July 22, down from 52.3 in June and the lowest since March 2009.
The all-sector PMI was slightly weaker than first estimated, at 47.3 — the lowest since April 2009 — due to a poor showing for Tuesday’s construction PMI. The fall from 51.9 in June was the biggest since the survey started in 1998.
Other business surveys have also shown large drops in confidence, though not always on this scale. Consumer confidence has fallen sharply since the referendum, but measures of retail spending have yet to show much of a hit.