Time for a recap:

Britain’s economy appears to have suffered its first quarterly contraction in almost seven years, after a slump in company activity during June.

Data firm Markit’s composite PMI, which tracks the private sector, reports that activity shrank in June for the first time since 2016. The service sector stagnated, while manufacturing and construction both shrank sharply.

Economists believe this means UK GDP contracted by at least 0.1% in April-June - ending a run of growth that dates back to 2012.

If the economy continues to shrink in July-September, then Britain would be in a full-blown recession by the autumn [a recession = two quarters of negative growth].

Chris Williamson, chief business economist at IHS Markit, warned that the economy could struggle in the current quarter.

“The latest downturn has followed a gradual deterioration in demand over the past year as Brexit-related uncertainty has increasingly exacerbated the impact of a broader global economic slowdown.

Risks also remain skewed to the downside as sentiment about the year ahead is worryingly subdued, suggesting the third quarter could see businesses continue to struggle.”

Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply, also fears economic turmoil ahead:

With a dampened mood across the sector, if a General Election is also thrown into the pot of political turmoil in the coming months, then the service sector runs an even greater risk of following the manufacturing and construction sectors into cutbacks, cost-cutting and reduced workforces.”

Here’s the full story:

In other news:

Eurozone government bond yields have fallen to record lows, after IMF managing director Christine Lagarde was named as the next head of the European central bank.

Lagarde is expected to maintain loose monetary policy and low interest rates, and possibly press on with new stimulus measures.

Some financial experts, though, are concerned that she doesn’t have a central banking background....although her managerial and communication skills could be vital.

Stock markets continue to rally, on hopes of lower interest rates across the world soon. Wall Street has hit a record high, Britain’s FTSE 100 is at an 11-month high, and eurozone equities are at their highest in two months.

But Brexit fears are still rife - Sainsbury’s have warned that a no-deal crisis could leave children without toys this Christmas, as Britain hasn’t got enough warehouse space to stock up.

You can read the PMI survey yourself, online here.

It’s important to remember that the PMIs are not official government data -- they’re calculated by IHS Markit based on interviews with purchasing managers.

Their view on output, activity, orders and confidence are converted into a single number -- anything over 50 shows growth.

So, according to Markit, here’s what happened in June:

• Services: STALLED, with the PMI falling to 50.2, a four-month low.
• Manufacturing: SHRANK at the fastest pace in six years, with the PMI falling to 48
• Construction: PLUNGED, with the PMI slumping to 43.1, the worst in a decade
• Overall private sector: SHRANK for the first time since summer 2016, with the PMI dropping to 49.2

Nick Kilbey, sales trader at Foenix Partners, says it paints a bleak picture:

This morning’s UK Services print completed the trifecta of woeful PMI figures for the week as it dropped below expectations at 50.2 vs 51.0.

With Manufacturing PMI at 6-year lows, Construction PMI showing the steepest decline since the recession and BOE Governor Carney stating that the central bank is stepping up planning to overcome the potential impact of a no deal Brexit, the short-term future looks bleak for the UK.

The purchasing managers' indices, or PMIs, track services sector companies, manufacturers and building firms around the world.

They measure activity, output, business confidence and hiring levels, to produce a health check on how these sectors are performing.

PMIs are compiled each month from interviews with 'purchasing managers' at thousands of companies. They produce a single headline figure – anything above 50 indicates a sector is growing, while a figure below 50 shows a contraction.

Economists watch these surveys closely as they look ahead to coming months, while the official data, such as gross domestic product and retail sales, tends to be more backward-looking. 

NEWSFLASH: Britain’s service sector slowed to near stagnation last month, as the wider private sector went into contraction.

That’s according to Markit’s latest survey of UK purchasing managers, just released, which suggests the UK contracted slightly in the April-June quarter.

Service providers reported that business activity was “close to stagnation in June”, Markit says, with subdued client demand and a further reduction in “work-in-hand”.

This dragged the Services PMI, which tracks activity in the sector, down to just 50.1, from 51 in May. That’s the lowest reading in three months, and virtually the 50.0 mark separating expansion from contraction.

But there’s worse news too. We learned earlier this week that manufacturing and construction both contracted month. Add in the services data, and it appears that the UK private sector shrank in June for the first time since 2016 - just after the EU referendum.

This suggests that the uncertainty created by Brexit means the UK economy shrank by 0.1% in the last quarter -- putting it half-way into a full-blown recession!

Chris Williamson, Chief Business Economist at IHS Markit, explains:

“The near-stagnation of the services sector in June is one of the worst performances seen over the past decade and comes on the heels of steep declines in both manufacturing and construction. Collectively, the PMI surveys indicate that the economy has slipped into contraction for the first time since July 2016, suffering the second-steepest fall in output since the global financial crisis in April 2009.

“The June reading rounds off a second quarter for which the surveys point to a 0.1% contraction of GDP.

“The latest downturn has followed a gradual deterioration in demand over the past year as Brexit-related uncertainty has increasingly exacerbated the impact of a broader global economic slowdown. Risks also remain skewed to the downside as sentiment about the year ahead is worryingly subdued, suggesting the third quarter could see businesses continue to struggle.

Several City economists and analysts are expressing concerns over Christine Lagarde’s suitability to run the European Central Bank.

The problem, as mentioned earlier, is her lack of experience at the sharp end of monetary policy.

Jim Reid of Deutsche Bank reckons Philip Lane, the ECB’s new chief economist, will have to do a lot of heavy lifting on economics. Reid told clients this morning:

Given her relative inexperience with the ECB’s (complicated) policy toolkit, there is a credibility risk, especially if and when things get more complicated economically, but markets will like the fact that she is a skilled and well connected political operator.

The euro weakened a touch in response to the announcement, possibly reflecting the fact that a more hawkish individual was not chosen. It’s probable that the intellectual economic legwork will now need to be carried solely by Chief Economist Lane, the only trained economist at the top of the new leadership team (recently-appointed Vice President de Guindos is, like Lagarde, a lawyer by training). That said, a lawyer could prove to be useful in the current environment, with the focus on the legal limits of ECB asset purchases, “disenfranchisement,” the risk of debt restructurings, and the prohibition on monetary financing of governments.

Erik Nielsen, chief economist at Italy’s UniCredit, is also worried that Lagarde isn’t trained in monetary policy.

He told Bloomberg TV that Lagarde was a very intelligent person, and a great communicator, knows how to run big organisations:

In normal times she’d be fine, but it is not quite normal times now.

She is not known to have engaged in a monetary policy discussion at G7 level.

What if, or when, a downturn or a crisis comes, who does she rely on, without her own educational framework or experience at a central bank?

Good questions raised by @ErikFossing . #Lagarde is first and foremost a brilliant, smart and sensitive politician. I'm not sure this is enough to deal with the next #euro crisis and this is an understatement https://t.co/0q6GZx1yOk

— Eric L Chaney (@ericlchaney) July 2, 2019

Marc Ostwald of ADM Investor Services worries that the European Central Bank would be more ‘politicized’ under Christine Lagarde, rather than sticking strictly to monetary

The appointment of Lagarde as ECB president will a) raise questions about politicization of the role, above all because b) in sharp contrast to Draghi, Lagarde does not have any background in economics or indeed monetary policy formulation.

By extension this puts even greater emphasis on finding a successor for the excellent, always thoughtful and extraordinarily Benoit Coeure as director of operations - who would have been the ideal choice as Draghi’s successor.

Mark Haefele, chief investment officer at UBS Global Wealth Management, points out that Lagarde does have other powerful skills, which she’ll need to run the ECB.

If confirmed – Lagarde would be the first ECB president ever without any experience in monetary policy. We think her management experience, including time as chairwoman of the IMF, would help her to lead the ECB as an institution.

However, Lagarde will likely face many challenges along the way. While the IMF chief is considered a qualified candidate, that won’t necessarily make Europe a more attractive place to invest over a tactical horizon.”

European stock markets are also rallying, matching the gains in the bond market, following Lagarde’s nomination.

The EU-wide Stoxx 600 index is up 0.4% at 390 points, its highest level since the start of May. Utility companies, healthcare firms and consumer goods makers are all up.

Banks are lagging, though (as a Lagarde-led ECB isn’t likely to help their profits by raising interest rates).

Britain’s FTSE 100 has romped to a 10-month high, up 0.5% at 7,597, helped by the pound’s weakness (down at $1.256 this morning).

Boom! Belgium’s 10-year government bond yield has just plunged below zero for the first time ever.

This comes as French and German bond yields also tumble deeper into negative territory, as the eurozone bond rally gathers pace.

This suggests investors are optimistic that Christine Lagarde will take a dovish approach to running the ECB..... and are pessimistic about growth and inflation prospects.

Here’s Reuters take on this morning’s market action:

Government bond yields in much of the euro zone fell to fresh record lows on Wednesday, after European Union leaders agreed to name France’s Christine Lagarde as the new head of the European Central Bank.

Analysts expect Lagarde to continue current ECB chief Mario Draghi’s dovish policy stance. If approved by the European parliament, Lagarde would succeed Draghi when his term expires at the end of October.

Ten-year bond yields across the bloc fell 1-3 basis points in early trade. Germany’s 10-year bond yield hit a new record low of minus 0.39%, while French 10-year bond yields hit a new low of minus 0.079%.

Ladies and Gentlemen, would you please welcome Spain’s 7 year bond to the negative bond yield club. A first time entrant and a country where youth unemployment is STILL 34%. #buybitcoin #bondmarkets pic.twitter.com/weFmbaekB7

— ListedReserve (@listedreserve) July 3, 2019

Euro area bond yields extend fall as traders digest Lagarde's ECB appointment https://t.co/2ONs4Jah2T https://t.co/n8mxZOj1s9 pic.twitter.com/kCy82cMw4A

— Forex, Stock & Crypto Signals Tools & News (@ForexLinksTools) July 3, 2019

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

At the start of this week, you’d have got decent odds on Christine Lagarde becoming the eurozone’s top central banker.

She certainly wasn’t seen as a front-runner to become the next president of the European Central Bank -- Bundesbank president Jens Weidmann or Banque de France governor François Villeroy de Galhau were more likely candidates.

But when the dust finally cleared in Brussels yesterday, after days of tough negotiations between EU leaders, the head of the International Monetary Fund emerged as the chosen successor to Mario Draghi.

Lagarde’s nomination is part of a package that finally breaks male dominance of Europe’s top institutions, with Germany’s defence minister, Ursula von der Leyen nominated to head the European commission.

Investors are reacting to Lagarde’s nomination by piling into eurozone government bonds. They’re calculating that the ECB will continue offering easy money and record low interest rates on Lagarde’s watch, rather than tightening monetary policy soon.

This is driving bond prices to fresh highs, forcing down the interest rate (or yield) even lower.

Germany’s 10-year bond, for example, is now trading at a yield of nearly minus 0.4%! That means investors are paying for the privilege of holding the debt until it matures.

The German 10-year bond #yield at -0.39%! Sure, why not... pic.twitter.com/UOpZ6vqn4K

— jeroen blokland (@jsblokland) July 3, 2019

Lagarde will join the ECB at a crucial time (assuming MEPs approve her appointment). With growth weakening and inflation low, policymakers are already pondering what fresh stimulus measures are needed.

Lagarde has already reacted, saying:

“I am honored to have been nominated for the Presidency of the European Central Bank.

In light of this, and in consultation with the Ethics Committee of the IMF Executive Board, I have decided to temporarily relinquish my responsibilities as Managing Director of the IMF during the nomination period.”

I am honored to have been nominated for the @ECB Presidency. In light of this, and in consultation with the Ethics Committee of the IMF Executive Board, I have decided to temporarily relinquish my responsibilities as IMF Managing Director during the nomination period.

— Christine Lagarde (@Lagarde) July 2, 2019

But, there’s already concern in the markets about Lagarde’s appointment. Although she’s run the IMF for several years, and also served as France’s finance minister, she is undoubtedly not a central banker. Before entering politics she served as a lawyer, not an economist.

Now, a legal background didn’t stop America’s Jerome Powell becoming head of the US Federal Reserve. Lagarde was also one of the key figures (for good or ill) through the eurozone crisis, so knows the challenges facing the ECB well.

But will she provide the same leadership as Draghi, who famously saved the euro in 2012 with a ground-breaking stimulus programme, in the face of firm opposition from hawkish colleagues.

Investors may question whether Lagarde can be trusted to do “whatever it takes” when the next crisis comes.....

Also coming up today

New PMI surveys from Markit will show how the world’s service sector companies fared last month.

With manufacturing struggling, and global trade under pressure, services is doing a lot of heavy lifting for the global economy. Eurozone and US services firms will probably report slower growth, while the UK could be lacklustre.

We also get a flurry of US data, ahead of tomorrow’s 4th July celebrations.

The agenda

• 9am BST: Eurozone services PMI for June (expected to rise to
  53.4 from 52.9, showing faster growth)
• 9.30am BST: UK services PMI for June (expected to be unchanged at 51)
• 1.30pm BST: US trade balance for May (expected to widen to -$53.4bn, from -$50.8bn)
• 3pm BST: US services PMI for June (expected to drop to 56, from 56.9)
• 3pm BST: US factory orders for May (expected to fall by 0.5%, following an 0.8% drop in April)