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Economy in sharp contraction post Brexit vote

22 July 2016

The latest figures from Markit’s Purchasing Manager’s Index (a survey of 650 businesses) show a fall to 47.7 in July, indicating a ‘contraction’ of activity in the manufacturing and services sectors.  

While there has been a decline in orders within the industries, exports have increased due to the weakening of the pound, following Brexit.

Chief Economist of Markit,  Chris Williamson, said in a statement: 

“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.” 

“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’.”

It should also be noted that the Markit figures do not include construction that anecdotally has also seen a sudden drop in confidence.  If this sector was included then it is likely that the figure would have been worse.

Analysts predict there is further trouble to come with some suggesting the UK is heading for another recession. 

It is not just the manufacturing industry that is in danger; the property sector is starting to see a fall in property prices which is reflected by the House Price Sentiment Index. Levels have also dropped to contraction and many homeowners across the UK believe their homes have lost value.

So how have the markets reacted?  As is now universally accepted, the FTSE 100 does not completely reflect the UK economy.  In fact, the value of FTSE has gone up as the markets expect more stimulus from Banks around the world and the Bank of England, and a possible rate cut that tends to boost asset prices. However, the value of the pound has fallen a bit more against the dollar.  The fall in the pound is the obvious result of Brexit but time will tell as to what effect this will have long term.

The Brexiteers have been defiant saying that they expected a short term blip but that the economy would do better in the long term.

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