Brexit hit UK manufacturing harder than initially estimated

[LONDON] UK manufacturing shrank more than initially forecast in July, suffering its biggest drop in more than three years.

A Purchasing Managers' Index slumped to 48.2, below the one-off flash reading of 49.1, Markit Economics said Monday in London. The index has only fallen below the 50 mark - which separates expansion from contraction - one other time since early 2013. The index was at 52.4 in June.

The report suggests that Britain's decision to leave the European Union may have a harsher impact on the economy than initially expected. Markit's flash estimates published last month had already signalled that business activity was shrinking at its fastest pace since the last recession seven years ago. That prompted Bank of England official Martin Weale to change tack and back his colleagues' call for easing this week.

BOE policy makers kept the benchmark rate at a record-low 0.5 per cent in July and signalled that stimulus was likely in August. The nine-member Monetary Policy Committee announces its next decision on Thursday, when it will also publish new forecasts for growth and inflation.

"The weak numbers provide powerful arguments for swift policy action," said Rob Dobson, an economist at Markit.

"The downturn was felt across industry, with output scaled back across firms of all sizes and across the consumer, intermediate and investment goods sectors."

The decline in production was the steepest since October 2012, Markit said. New orders also contracted, suggesting uncertainty in the domestic market offset any boost to exports from the weaker pound.

While manufacturing exports were the only bright spot in the initial report, Markit said that the improvement was "less marked than previously estimated" due to sluggish overseas demand. The drop in the currency pushed input-cost inflation to a five-year high.

Employment fell for a seventh month in July, with firms linking lower staffing to the drop in output and new orders.

BLOOMBERG