Friday 22 July 2016 1:33 pm

Pound extends losses as UK economy contracts at “fastest pace since 2009”

The pound edged nearer a post-referendum low against the dollar in more than five years after figures this morning showed the  UK's economy has contracted at its "steepest pace since early 2009".

The pound was down more than one per cent against the dollar in lunchtime trading, at $1.3096, and almost 0.9 per cent against the euro, at €1.1891. Last month sterling fell to a 31-year low against the dollar

Markit's flash UK purchasing managers' index plummeted to 47.7 in July, down from 52.4 in June and an 87-month low, suggesting the economy is on track to contract by 0.4 per cent in the third quarter. 

Output and new orders both fell for the first time since the end of 2012, the figures showed. 

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“July saw a dramatic deterioration in the economy, with business activity slumping at the fastest rate since the height of the global financial crisis in early-2009," said Chris Williamson, chief economist at Markit.

“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’.

“At this level, the survey is signalling a 0.4 per cent contraction of the economy in the third quarter, though much of course depends on whether we see a further deterioration in August or if July represents a shock-induced nadir. 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."

The figures caused the pound to fall 0.4 per cent against the dollar, to $1.3175. However, after an initial dip shares edged higher, with the FTSE 100 rising 0.1 per cent. 

The news may provide further fuel to the Bank of England's monetary policy committee, which has strongly suggested it will provide economic stimulus at its August meeting. That could take the form of an interest rate cut, which failed to materialise this month, or it could come as increased quantitative easing, or both. 

"The collapse in the composite PMI to its lowest level since April 2009 provides the first major evidence that the UK is entering a sharp downturn," said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

"The confidence shock from the Leave vote might wear off over the coming months, but the decline in the new orders index to just 46.2, from 53.0 in June, points to even faster falls in output ahead.

"Admittedly, the composite PMI dipped well below 50 in 1998, 2001 and 2003, without the economy entering recession. But the composite PMI also could be too sanguine, because it excludes the construction sector, which is at the sharp end of the downturn in business investment."