The news saw sterling fall and gilts rise as the data further raised expectations that the Bank of England’s Monetary Policy Committee would lower interest rates at its August meeting.
The headline Markit Flash UK Composite Output Index, the data for which was collected between July 12 and 21, fell to 47.7 for July, its lowest reading since April 2009.
At a month-on-month level, the firm said the index movements for both the Composite Output (down 4.7 points) and the Composite New Orders indices (down 6.8 points) were the steepest drops registered in the series histories.
“The 10.4 point decline in the Services Business Expectations Index was also the largest on record,” it added.
According to Markit, output and new orders fell in both the manufacturing and services sector during the month, but the downturn was more marked in services, where both measures fell at the quickest rates in over seven years.
While manufacturing was hit, new export business rose for the second straight month as a result of the sharp drop in sterling.
Chris Williamson, chief economist at Markit, said: “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’.
He added: “At this level, the survey is signalling a 0.4% 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.”
Some caution needed
Both Williamson and David Page, senior economist at AXA Investment Managers believe the slump in the PMI data will likely be sufficient to convince the MPC to begin monetary policy easing in August, Page did highlight the need for caution when looking at the numbers.
Page said the firm is cautious over the scale of the decline, partly because the numbers released on Friday are ‘preliminary’ releases, that Markit does not normally provide for the UK and thus may be subject to revision.
“Moreover, business reaction itself may be more ‘pre-emptive’ and it will be important to see where these indices settle over the rest of Q3. However, the indices are consistent with other business surveys, for example the Lloyds Business Barometer, which also recorded a material drop in its latest reading, taking it to the lows of 2011,” he said.
Paras Anand, head of European equities at Fidelity International agrees, adding there may be some reasons why the data may bounce back.
“Over the last 12 months, the value of sterling has fallen by around 15%, and over 20% since its peak against the US dollar in 2014. This means that all assets priced in sterling – be they physical property, intellectual property or human capital – look attractive in a global context,” he said.
Adding: “There are other factors at play which may trigger new activity: the uncertain outlook for end demand over the past few years has led to companies hoarding cash. This has been most visible in sectors such as software and healthcare but is a broader phenomenon. I think this suggests that the medium-term outlook for corporate activity remains robust and would not be surprised to see a number of significant bids for UK-listed companies before the year is out.”