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Britain’s economy wilting fast after Brexit vote, may prompt more spending

By our correspondents
July 23, 2016

LONDON: Britain´s economy is shrinking, the broadest survey of business confidence since last month´s historic vote to quit the European Union showed on Friday, piling pressure on new Prime Minister Theresa May´s government to soften the impact.

Philip Hammond, the new finance minister, had already hinted at loosening the national purse strings.

The flash, or preliminary, Markit survey of purchasing managers - executives who make spending decisions at 1,250 big firms - fell by the most in its 20-year history.

It was consistent with an economy contracting 0.4 percent in the third quarter, contrasting with an actual reading of plus 0.4 percent in the first quarter.

"July saw a dramatic deterioration in the economy," said Chris Williamson, Markit´s chief economist.

"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 readout, little more than a week after May formed a new Conservative government, indicates the scale of the challenge she faces to maintain market and investor confidence as she embarks on what promises to be long and difficult Brexit talks.

Hammond, speaking on a trip to China just before the release of the PMI surveys, gave the clearest indication yet that he may respond to the weakening economy by steering away from the restrictive fiscal policy of predecessor George Osborne.

"Over the medium term we will have the opportunity with our Autumn (budget) statement to reset fiscal policy if we deem it necessary," Hammond said.

Hammond is attending a weekend meeting of finance ministers from the Group of 20 economies at which counterparts will be keen to hear how Britain can pull off a smooth exit from the EU while minimising the damage to the global economy.

The International Monetary Fund has already cut its forecast for global growth after Brexit threw "a spanner in the works".

It has slashed its UK growth forecast for 2017 by 0.9 percentage points to 1.3 percent.

The darkening outlook jars with the resolute optimism of newspapers that backed Brexit: "Britain BOOMS after EU vote: Ignore the doom-mongers it´s good news all round," the Daily Express has trumpeted in a raft of bullish headlines this week.

The Markit PMIs, which give an early indication of how gross domestic product is likely to perform, suggest the 1.8 trillion pound ($2.4 trillion) UK economy is shrinking faster than at any time since the aftermath of the global financial crisis.

It showed the services sector - one of the few British growth drivers - has been hit especially hard by Brexit, with orders plunging and confidence crumbling.

A major concern among businesses is the access Britain will have to the EU´s single market after leaving.

Britain insists it want to limit freedom of movement of workers; the EU says such freedom is a condition of the single market.

The PMI for the services sector fell to 47.4 in July from 52.3 in June, the steepest drop since records began in 1996 and the worst reading since March 2009, around the low point of the global economic recession.

Economists polled by Reuters had expected a much smaller fall to 49.2.The evidence of a sharp drop in business activity across a broad swathe of Britain´s economy may alarm the Bank of England, which is trying to decide how aggressively to act at its August policy meeting to cushion the shock of the referendum vote.

Following the report, sterling fell by a cent against the dollar to the day´s low and British government bond prices rose.

Sterling´s post-referendum plunge to its lowest level against the dollar since the mid-1980s has helped manufacturing exports expand at the fastest pace in almost two years, Markit said.

But the pound´s fall also pushed up the costs faced by British manufacturers for energy and raw material at the fastest pace in five years.

"This is the first major survey showing the pace of activity through the economy and it is soft.

Taken literally it would imply a period of contraction in the economy," Investec analyst Philip Shaw said.