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Shrinking UK business activity adds to pressure for BoE action

The UK services industry declined at its fastest pace in July since 2009, following Britain’s decision to leave the EU.

Bank of England (BoE) officials met to decide how to support the economy, after the decline added pressure to loosen policy. The BoE is expected to reveal fresh stimulus when the next policy announcement is made on Thursday.

Martin Beck, Senior Economic Adviser to the EY Item Club, said: “These results will … provide the final confirmation to the [Bank’s Monetary Policy Committee] that, at the very least, a precautionary loosening of monetary policy is warranted” [1].

In a report, the Chartered Institute of Procurement and Supply (CIPS) survey group mentioned that the Markit/CIPS services purchasing managers’ index (PMI) fell to 47.4 in July from 52.3 in June, showing a contraction in UK business activity. According to the index, a level above 50 indicates an expansion.

Chris Williamson, Chief Economist at Markit, London, said: “It’s too early to say if the surveys will remain in such weak territory in the coming months, leaving substantial uncertainty over the extent of any potential downturn” [2].

Samuel Tombs, UK Economist at Pantheon Macro, said: “The collapse in the business activity index to its lowest level since March 2009 shows that uncertainty about the UK’s future trading arrangements has had a more malign impact on the UK economy than the eurozone’s debt crisis ever did” [3].

So far, there is no significant data available to determine how the UK or EU has been affected by the vote, although the UK pound has fallen significantly against the dollar since the referendum.

[1] Financial Times “Weaker UK services sector adds to pressure for BoE action” next.ft.com

[2] Bloomberg “U.K. Services Shrink Most Since 2009 as Confidence Slumps” Bloomberg.com

[3] Guardian “UK services sector contraction adds to recession fears” Guardian.com