LONDON – A closely watched monthly economic survey indicates that the British economy is heading for a sizeable contraction in the third quarter in the wake of the country’s decision to leave the European Union, whereas the neighbouring 19-country eurozone economy appears to have brushed aside any of the negative fallout from so-called Brexit — at least so far.
Financial information company IHS Markit said Wednesday that its composite purchasing managers index — a broad gauge of activity across the manufacturing and services sector — rose in July for the eurozone to a six-month high of 53.2 points from 53.1 the previous month. It was also higher than the initial estimate of 52.9.
The numbers are on a 100-point scale, with figures above 50 indicating expansion.
Though the eurozone economy continues to grow, it’s not expanding at a substantive rate. The firm says the current level of its main index is consistent with modest quarterly economic growth of 0.3 per cent, which would be unchanged from the previous three-month period.
IHS Markit’s chief economist Chris Williamson said Wednesday that the increase, which was driven by the eurozone’s largest economy, Germany, was “especially encouraging as it suggests the region saw little overall contagion from the U.K.’s ‘Brexit’ vote.”
The picture is very different for Britain, where the equivalent indicator slumped to 47.3 in July from 51.9 the previous month. That, according to the firm, signals a 0.4 per cent quarterly contraction in the third sector.
“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,” said Williamson.
However, he said the “unprecedented” monthly drop “has undoubtedly increased the chances of the U.K. sliding into at least a mild recession.”
The Bank of England is set to respond to the deteriorating economic outlook by cutting its main interest rate on Thursday from the current record low of 0.5 per cent and unveiling other measures designed to stimulate the British economy.