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UK's private sector takes a bit hit from Brexit

July 22, 2016

A key business index has shown that Brexit has battered the UK economy, with worry causing in a drop in service orders. But Germany has seemed to have emerged from the chaos in good shape.

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Symbolbild London Canary Wharf Großbritannien Finanzdistrikt
Image: picture-alliance/dpa

According to a monthly survey often used as an economic bellwether in advance of official statistics, Britain's business activity fell in July to its lowest level since April 2009, providing first evidence to the assumption of Brexit's damaging effect on the country's economy.

"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," said Chris Williamson, chief economist at Markit.

The preliminary composite purchasing managers' index (PMI), a study of manufacturing and service industries conducted by the Markit group, tracked a record drop from 52.4 points in June to 47.7 points in July. A value under 50 indicates that private economic activity was contracting.

'Further pain to come'

Markit expects that the British economy will contract by 0.4 percent in the third quarter, from July to September. The service sector - a vital source of the country's growth - took a hard hit due to a drop in orders and confidence. Manufacturers meanwhile have struggled with higher input costs due to the drop in the pound.

"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," Williamson said, adding that he believed the numbers will push British policymakers to act.

The Bank of England decided earlier this month to wait and see how the situation develops before initiating any monetary stimulus, possibly cutting interest rates when it meets next in August. It published a report on Wednesday that pointed to continued uncertainty without finding much of a drop yet in activity.

German executives pessimistic about post-Brexit UK economy

Also this week, the International Monetary Fund slashed its global and British growth forecasts for this year and next, citing uncertainty created by Brexit.

Germany growing, Europe slowing

The survey showed that private sector activity in Germany has so far been unaffected by the fallout after Brexit, reaching 55.3 points, the highest point of the year.

But while service numbers were strong, feelings of uncertainty about future growth increased and manufacturing and hiring were seen to have slowed.

Williams expressed optimism nonetheless for the German economy, expecting it to grow by 0.5 percent in the third quarter.

Growth in the eurozone as a whole was tracked at 52.9 points in July, its lowest level since the start of 2015. Gains by Germany and France were offset through losses by Italy and Spain.

Still, according to Ben May of Oxford Economics, "it's a pretty pleasant surprise that the fall was so muted. It suggests that Brexit is unlikely to trigger the substantial slowdown that many people are predicting."

Markit expects 0.3 percent third quarter eurozone growth.

jtm/ (AFP, Reuters)