Monday 1 August 2016 9:49 am

UK manufacturing PMI sinks even lower after EU referendum

The most up-to-date measure of economic output among UK manufacturers has slumped to its lowest level in more than three years following the EU referendum.

The manufacturing purchasing managers' index (PMI), which is closely watched by policymakers at the Bank of England, dropped to 48.2 in July, from 52.4 in June. That was even lower than a flash estimate had indicated two weeks ago and marks the index's lowest reading since February 2013 where scores below 50 indicate contraction.

Firms reported uncertainty both in the run-up to the 23 June vote and the month after had weighed on their performance, in the sharpest fall in actual economic activity recorded since October 2012. Job losses in the industry were also running at their second-highest level in more than three years. 

An earlier PMI estimate, published one month after the vote, which came in at 49.1 would have been consistent with an economic contraction of around 0.4 per cent in the third quarter of the year. Manufacturing is just one of three components which make up the composite PMI, along with construction and services. The latter, which accounts for around 80 per cent of the UK economy, will be seen as crucial to interpreting the fallout from the EU referendum. Figures for those will be published later this week.

GDP figures out last week showed the UK's production sector – which is largely made up of manufacturing – increased at its strongest pace for 17 years after falling into a technical recession for the third time in a decade at the start of the year.

Russ Mould, investment director at AJ Bell said: "Today’s industrial sentiment survey for July will only add to concerns that the UK may be sliding toward a fresh economic downturn."

Those in search of silver linings will point to the fact that export orders rose slightly, for the second consecutive month, as the weaker pound and a big push from firms to win new contracts resulted in new business from outside the UK.

Rob Dobson, senior economist at Markit said: "The pace of contraction was the fastest since early 2013 amid increasingly widespread reports that business activity has been adversely affected by the EU referendum. The drops in output, new orders and employment were all steeper than flash estimates.

"The downturn was felt across industry … the weakening order book trend and upswing in cost inflation point to further near-term pain for manufacturers."

The Bank of England's rate-setting monetary policy committee (MPC) will meet this week with markets expecting Threadneedle Street to cut interest rates to 0.25 per cent and unleash another round of quantitative easing.

"The overall negative tone of the survey reinforces the case for a monetary loosening on at Thursday’s MPC meeting," said Scott Bowman of Capital Economics.