The City is braced for the Bank of England to cut interest rates to a new record low after Threadneedle Street was provided with fresh evidence of the hit taken by the economy in the immediate post-Brexit-vote period.
The Bank’s nine-strong monetary policy team is expected to cut borrowing costs from 0.5% – where they have been pegged since March 2009 – in response to signs that all parts of the economy have been affected by a slowdown in orders and output.
Some City analysts believe the Bank may be tempted to cut interest rates to 0.1%, although the majority believe Thursday’s announcement will be a reduction to 0.25% despite the latest gloomy health check on the economy from Markit/Cips.
The much-watched barometer of the state of manufacturing, construction and services found that the deterioration in the weeks immediately following the referendum pointed to the economy contracting by 0.4% in the third quarter of 2016.
Earlier this week, Markit/Cips said its final estimate of the state of manufacturing in July was even more negative than its flash estimate released a little less than a fortnight ago. An updated report on the services sector, published on Tuesday underlined the blow to a sector that accounts for almost four-fifths of the economy’s output.
The final purchasing managers’ index for services for July fell from 52.3 to 47.4 in June – the sharpest drop on record and in line with a flash estimate provided by Markit/Cips just under two weeks ago.
A composite PMI, including manufacturing as well as services, showed a slightly bigger fall than first feared, declining from 52.5 to 47.5.
Construction was not included in the original flash estimate of economic conditions in the aftermath of the Brexit vote, but the all-sector PMI fell from 51.9 in June to 47.3 in July, its lowest level since the economy was in recession in April 2009. Any reading below 50 indicates that activity is contracting.
Chris Williamson, Markit’s chief economist, said: “The marked service sector downturn follows news from sister PMI surveys showing construction activity suffering its steepest decline since mid-2009 and manufacturing output contracting at the fastest rate since late 2012. At these levels, the PMI data are collectively signalling a 0.4% quarterly rate of decline of GDP.
“It’s too early to say if the surveys will remain in such weak territory in coming months, leaving substantial uncertainty over the extent of any potential downturn. However, the unprecedented month-on-month drop in the all-sector index has undoubtedly increased the chances of the UK sliding into at least a mild recession.”
Samuel Tombs, a UK economist at Pantheon Macroeconomics, said: “The collapse in the business activity index to its lowest level since March 2009 shows that uncertainty about the UK’s future trading arrangements has had a more malign impact on the UK economy than the eurozone’s debt crisis ever did.”
Tombs added that the Bank of England tended to cut interest rates by 0.5 percentage points when the PMIs were as weak as they were in July. “But with inflation likely to overshoot the committee’s target as a result of sterling’s depreciation and zero rates likely to adversely impact pension funds and banks’ profitability, we think that the MPC will be cautious and only cut bank rate to 0.25%,” he said.
The TUC general secretary, Frances O’Grady, said: “Action from the Bank of England to help keep the economy moving will be welcome. But with interests rates already so low, it’s the government that can make the biggest difference. The TUC has published an action plan to protect jobs and growth. The government must immediately give the go-ahead for a third runway at Heathrow, bring forward major new infrastructure projects like high-speed rail and announce a big expansion in housebuilding.”