British economy heading straight for a recession

In the final analysis, this was to be expected: but the impression gained from the latest survey indicators on sentiment in the British economy directly after the Brexit vote is overwhelming. The industrial climate, measured in terms of the Purchasing Managers‘ Index for the manufacturing sector, plummeted in July to the lowest level in three years, with the almost four index-point drop the strongest even in five years. At just around 48 points, the indicator now lies way below the 50 point threshold considered to be the starting point for growth. The purchasing managers‘ assessment even deteriorated noticeably during the survey period. Compared with a preliminary estimate, which was only based on 85 percent of the survey results, this final indicator reading has been revised downwards again by nearly a full percentage point. The surveyed companies unanimously cite the now widespread uncertainty over the economic consequences of the referendum as the main reason for their far more subdued assessment.

Sentiment in the service sector is even more pessimistic: here the Purchasing Managers‘ Index was even down by nearly five index points – a level never seen before in the some 20-year history of this indicator. The current reading of 47.4 points has not been this low since the economic crisis of 2008/09. The British finance industry, in particular, rightly fears far-reaching consequences as a result of the EU exit and the predictable loss of the so-called “EU passport” that gives banks domiciled in Great Britain freedom to distribute their financial services throughout the entire EU. The at least partial exodus of numerous international financial instutions from London is now a realistic scenario that could also have widespread consequences for employment, consumption or building activity. It comes as no surprise to learn that sentiment in the building sector and among private households has also soured. The corresponding Purchasing Managers‘ Index for the building industry has now also marked a seven-year low of 45.9 points, with both the commercial and the residential segment of the industry anticipating a marked deceleration in demand. And the British population, most of whom had voted in favour of Brexit, now appear to be shocked themselves by the consequences of their decision. This is at least being signaled by the consumer climate which entered a nosedive at record speed in July, with consumers making sizeable cuts above all to their economic expectations but also to their earnings expectations.

Until now, the only data available have been these sentiment indicators, with the „hard“ data on the economic development in Great Britain following the „Brexit shock“ yet to come. First figures offering signs of actual economic growth in July will not be announced before late August/early September. In the past, however, a pronounced sentiment downswing in the British economy of this kind was always associated with a collapse in growth, while a Purchasing Managers‘ Index marking such low levels proved a reliable predictor of a downturn in economic output. We therefore confirm our forecast that the British economy will contract noticeably this quarter in response to the Brexit vote which ultimately came as a surprise to all. And because the uncertainty is likely to continue for the time being, a recovery will not be on the cards in the near future either. Great Britain can therefore brace itself for an inevitable recession in the second half of this year.

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