In the wake of Britain's vote to leave the European Union, the country has seen a “dramatic deterioration” in economic activity, according to one firm's analysis released Friday.
In July, a closely watched indicator of the country’s economic health known as the purchasing manager’s index (PMI), produced by the research firm IHS Markit, dropped to 47.7 percent. That’s the lowest level since April 2009, when Britain was in the throes of the global financial crisis, the firm says.
With a level below 50 indicating a contraction, according to the BBC, the survey’s release has led many analysts to conclude that the landmark decision to leave the EU could have a large-scale impact on the economy, at least initially.
"The only other times we have seen this index fall to these low levels, was the global financial crisis in 2008/9, the bursting of the dot-com bubble, and the 1998 Asian financial crisis," Chris Williamson, chief economist at IHS Markit, told the BBC. "The difference this time is that it is entirely home-grown, which suggest the impact could be greater on the UK economy than before.”
Both manufacturing and the service sector, which includes businesses such as transportation, restaurants, and computing and makes up nearly 80 percent of Britain’s economy, saw notable declines in the PMI survey, the Financial Times reports.
The PMI for the service industry dropped to 47.4 in July, compared to 52.3 in June. Ahead of the Brexit vote on June 23, another Markit survey showed 1 in 3 businesses in the sector cited the vote to leave the EU as creating anxiety about hiring new staff.
But for manufacturers, there is one bright spot amid gloomy predictions: New exports have seen the largest increase in two years, according to Markit. That could be result of decreases in the pound’s value, economist Marcus Wright said on Twitter.
That weaker sterling might already be lending a hand - new export orders at their highest in almost two years. PMIs pic.twitter.com/4fJh7atX9U— Marcus Wright (@MarcusEconomics) July 22, 2016
Philip Hammond, who recently became Chancellor of the Exchequer in a shakeup of the ruling Conservative Party under new Prime Minister Theresa May, told Sky News that the PMI survey indicated that business’ “confidence” had been affected by the vote.
“It tells us that people’s confidence, business’ confidence has been dented. They’re not sure, they’re in a position of uncertainty now,” he told Sky News from China, where he was due to attend the G20 meeting in Beijing, The Guardian reports.
Mr. Hammond also said he believed he could still “reset fiscal policy” during Britain’s Autumn Statement, an annual report the Treasury makes to Parliament when economic forecasts are published in the fall.
That statement could potentially mean larger policy changes if the economy declines further, said BBC economics editor Kamal Ahmed.
"That opens up a host of possibilities. More borrowing? More infrastructure spending supported by the state as well as private money. Yes the government has said it wants to 'live within its means,'" Mr. Ahmed wrote. "But as with Mrs. May, Mr. Hammond might be rather more headline grabbing on changes in economic direction than some expected."
But some economists told the BBC that it’s also possible that the gloomy forecasts will not last, a more optimistic tone echoed by Mario Draghi, president of the European Central Bank, who said Europe’s financial markets had “weathered” the uncertainty of Britain’s vote.
“So this is a troubling set of results. But it is just one month's worth,” wrote the BBC’s Andrew Walker. “It is possible that this is a ‘shock-induced nadir,’ as the chief economist at the firm who conducted the survey put it, and that the economy will right itself in the coming months.”