Brexit: Manufacturing falls even faster than thought in wake of referendum vote

The reading of the Markit/CIPS manufacturing PMI implies the fastest rate of contraction in activity since February 2013

Productivity is expected to 'remain significantly lower than its pre-crisis trend rate throughout the next five years' (Getty)

Manufacturing activity fell even more rapidly in the wake of the Brexit vote than first expected, according to the latest much-watched survey snapshot of the sector.

Markit/CIPS said that in July its Purchasing Managers’ Index stood at 48.2, below the 50 point that separates growth from contraction – and also below the 49.1 “flash” estimate that it produced on 22 July.

The reading implies the fastest rate of contraction in UK manufacturing activity since February 2013.

Fastest contraction since February 2013

Markit/CIPS

Employment decreased for the seventh straight month in July and the rate of job loss was the second-fastest for almost three-and-a-half years, Markit/CIPS said. Firms attributed this to the decline in output and new orders.

The index from fresh orders dipped to 48.3, its lowest in three years.

David Noble of CIPS said the industry – which accounts for around 10 per cent of UK GDP – had taken a “backwards leap” since the 23 June vote to leave the European Union.

“Though these falls were not as marked as those seen during the Great Recession in 2007-2008 the drop was harsher than expected…Without new orders coming through, this downward trajectory is likely to get worse, at least in the short term.”

Uncertainty over the UK’s future trade relations with the rest of the European Union has hit confidence hard in manufacturing firms since the EU is the biggest overseas market for UK-produced goods. There are widespread fears that producers could face tariffs to export to the continent if the UK loses access to the European single market.

The message from the latest manufacturing PMI is very different from the surprisingly strong Office for National Statistics figures released last week, which showed an estimate that manufacturing output shot up by 1.8 per cent in the second quarter of this year, its biggest quarterly surge since 1999.

However, the ONS figures also showed that most of the activity growth was concentrated in April, with the pace of growth seen as falling away rapidly in May and June.

“The July UK Markit/CIPS manufacturing survey suggests that the surge in manufacturing output in Q2 was a one-off and the vote to leave the EU has added to pressures on the sector,” said Scott Bowman of Capital Economics.

“These disappointing figures would indicate that the uncertainty deterring manufacturers from making vital investment decisions prior to the EU referendum has taken a stranglehold since the vote and we can expect to see businesses continuing to protect cash and guard investment," said Mike Rigby, head of manufacturing at Barclays.

Economists say that the post-referendum output readings of the PMI surveys for manufacturing and also the dominant services sector are historically consistent with a contraction in overall GDP in the third quarter of 2016.

Many City of London economists are also expecting a return to recession, or two quarters of negative GDP growth.

The Bank of England is widely expected to cut interest rates from 0.5 per cent to 0.25 per cent on Thursday to support the economy.

Despite the overall weakness of the latest manufacturing survey, Markit/CIPS said the level of incoming new export orders rose for the second successive month in July aided by the recent depreciation of the sterling exchange rate. The pound has fallen around 10 per cent on a trade-weighted basis since the referendum vote.