Surveys of business sentiment are sometimes wrong. There are times when they give off false signals, predicting recessions that never materialise. The first big snapshot of the UK economy in the weeks immediately after Brexit is not one of those.
As expected, there has been a heavy blow to confidence and activity in the weeks after the referendum on 23 June. Few companies were expecting the UK to decide to leave the EU and even fewer had a contingency plan for such an eventuality.
In truth, the immediate hit to the economy is probably even more serious than suggested by the survey from IHS Markit and the Chartered Institute of Procurement and Supply. That’s because it excludes construction, where projects can be mothballed quickly. This sector looks especially vulnerable in the post-Brexit world.
Of the two sectors covered by the flash estimate, services have taken a bigger hit than manufacturing. Again, that’s unsurprising. Manufacturers will see the impact of Brexit cushioned by the fall in the value of the pound, which makes exports cheaper. What’s more, in the event that Britain cannot negotiate continued membership of the single market, EU tariffs on UK manufactured goods would be small.
For the service sector, however, it is a different story. It would be quite possible for the EU to impose quite tough barriers on UK service sector exports, and this is of deep concern, particularly to the City.
The abrupt and large fall in both orders and output reported by IHS Markit and the CIPS clearly makes a recession in the second half of 2016 a real risk. Similar results for August and September would suggest a 0.4% contraction in the economy in the third quarter. It only takes two successive quarters of contraction to constitute a technical recession.
There is a possibility, of course, that July will mark the depths of post-Brexit anxiety among business, and there have been a few positive signs. A new government has been formed that is taking its time about triggering the start of the UK’s divorce proceedings from the EU. Consumers still seem to be spending in the shops.
But the Bank of England will be taking no chances. Members of Threadneedle Street’s monetary policy committee wanted more evidence when they met earlier this month before sanctioning new measures to stimulate growth. Now they have it.
The Bank’s approach has been to exude calm reassurance that it is in control of events. But it is going to take more than words to prevent the economy sliding into recession, and most MPC members seem to understand that. A big package of measures from the Bank on 4 August – including an interest-rate cut – now looks inevitable.
