Pound Plummets On Renewed Recession Fears As PMI Shows Fastest Contraction Since 2009

Sterling plummeted nearly 200 pips this morning, after rising in early trade to just shy of 1.33, when the latest July Markit flash PMI surveys suggested the UK is heading for a quick recession in the form of a 0.4% GDP contraction in the third quarter. Manufacturing PMI tumbled from 52.1 to 49.1, modestly beating expectations, if still the lowest in 41 months, but it was the service economy which imploded, with the Service PMI plunging from 52.3 to 47.4, in line with the worst estimate, and the lowest print in 88 months.

 

While considered "soft data", and perhaps suggesting that Markit had not gotten the memo that Brexit fearmongering is now a thing of the past and is instead increasingly spun as positive for the local and global economy, the surveys pointed to the worst performance for more than seven years - when the economy was in the depths of a recession - in the aftermath of Brexit. As a result of renewed recession fear, the pound was trading below 1.31 at last check. 

Ironically, UK stocks jumped, with the FTSE trading well in the green as traders quickly figured these figures will add to pressure on the Bank of England to cut interest rates next month to cushion the economy from the Brexit blow.

The poor data comes as new Chancellor Philip Hammond indicated the UK could "reset fiscal policy" as data emerges about how the economy has reacted to the vote - indicating a less aggressive approach to cuts aimed at shrinking the deficit than that taken by former chancellor George Osborne.

Markit chief economist Chris Williamson said: "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."

He said the downturn - seen in order cancellations, a lack of new orders and the postponement or halting of projects - was "most commonly attributed in one way or another to Brexit".

The Service PMI print also saw a record slump in expectations. Markit's Williamson said it suggested there was "more pain to come in the short term at least".

He added: "At this level, the survey is signalling a 0.4% contraction of the economy in the third quarter, though much of course depends on whether we see a further deterioration in August or if July represents a shock-induced nadir."

Mr Williamson said the figures provided "a powerful argument for swift action" from the Bank of England as it weighs up whether to cut interest rates next month.

Cited by SkyNews, Investec economist Chris Hare said: "Our view remains that post-Brexit uncertainty will see the UK flirting heavily with a recession."

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The full commentary from Markit's chief economist, Chris Williamson

“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’.

 

“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.

 

“At this level, the survey is signalling a 0.4% contraction of the economy in the third quarter, though much of course depends on whether we see a further deterioration in August or if July represents a shock-induced nadir. 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.

 

“With policymakers waiting to see hard data on the state of the economy before considering more stimulus, the slump in the PMI will provide a powerful argument for swift action.”

David Noble, Group Chief Executive Officer at the Chartered Institute of Procurement & Supply: “The UK economy has suffered sharp falls in output and new orders following the EU referendum as uncertainty has taken hold. The overall pace of decline was the strongest since early-2009.

 

“Weaker sterling has driven a steep rise in input prices for manufacturers but there is a glimmer of positivity with the new exchange rate encouraging a rise in export orders. However, with a subdued global economy, it is not yet clear whether these opportunities will materialise in the long term.

 

“Supply chain managers must use this uncertainty to demonstrate what they do best – being agile, adaptive, sourcing the best goods and prices to steer their organisations successfully in the months and years ahead.

 

“The true extent of the impact of this uncertainty still remains to be seen next month. But with optimism in the UK’s service sector at a seven-and-a-half year low, policymakers must take swift action to stop further decline amid political upheaval.”