BUSINESS
07/22/2016 01:25 pm ET

Brexit Is Already Causing The U.K. Economy To Shrink

Demand for goods and services is falling at its fastest rate since the Great Recession.

The British economy is getting smaller, according to a major survey of business executives in the country.

The new data is the latest in a series of signs that the country’s vote for a so-called Brexit ― or exit from the European Union ― last month is already putting downward pressure on the economy.

At the United Kingdom’s biggest businesses, purchasing managers ― executives who control company spending ― report the sharpest drop in demand for goods and services than at any time since the Great Recession in April 2009, according to the survey by the London-based analysis firm IHS Markit.

It’s not an exact measurement of the country’s economic output, but according to IHS Markit, the survey’s results indicate a 0.4 percent decline in the U.K.’s gross domestic product in the third quarter of this year.

Friday’s bleak survey results follow other ominous signs about the ripple effects of the June 23 referendum to leave the EU, the world’s largest single market for goods and services. The International Monetary Fund predicts that the U.K. economy will grow by nearly a percentage point less than previously expected in 2017, the IMF announced Tuesday.

The effects of that poorer outlook, the IMF said, will be felt in the form of slower growth across the world. IMF chief economist Maurice Obstfeld attributed the pessimistic forecast to Brexit, claiming the vote had “thrown a spanner in the works” of the global economy.

And earlier this month, financial analysts blamed fears of reduced trade after a Brexit for pushing Italian banks closer to insolvency. The potential failure of the Mediterranean country’s banks poses a systemic threat to the European economy. 

The vote to leave is affecting demand for goods and services provided by British firms due to uncertainty about what kind of access the U.K. will have to the EU’s single market after leaving the bloc. The EU is Britain’s largest trading partner by far and a key source of income for London-based financial firms.

Britain's Chancellor of the Exchequer Philip Hammond, who assumed office on July 13, 2016, has a tough job ahead of him. The
ASSOCIATED PRESS
Britain's Chancellor of the Exchequer Philip Hammond, who assumed office on July 13, 2016, has a tough job ahead of him. The U.K. may face slower growth in the wake of the Brexit vote.

Even if the U.K. is able to negotiate tariff-free trade with the EU, it is far from clear that the remaining EU member nations will restore other aspects of the close economic ties that define EU membership.

Thanks to Britain’s EU membership, for example, British financial institutions enjoy “passporting” rights to lend freely on the continent. But France and Germany might be all too happy to restrict those rights going forward in an effort to help their own firms win a share of U.K. banks’ business.

One sticking point in negotiations is likely to be the issue of free movement of people within the EU. Controlling immigration was a big reason U.K. voters chose to leave the union, but the EU is not likely to grant unfettered access to its markets if Britain refuses to allow the free flow of people and workers, too. Non-EU countries like Norway and Iceland have only secured strong trade ties with the EU thanks to their agreement to welcome EU migrants and comply with a host of other EU regulations.

The new U.K. government, led by Conservative Prime Minister Theresa May, is already preparing to do damage control as it begins the long process of determining its future relationship to the EU.

Philip Hammond, the U.K.’s new chancellor of the exchequer ― a position equivalent to the U.S. Treasury Secretary ― responded to Friday’s economic news by promising to use higher spending or tax relief to stimulate the economy in the fall if it performs as poorly as projected, Reuters reported.

Days before leaving office, Hammond’s predecessor, George Osborne, decided to reduce Britain’s corporate tax rate to 15 percent in order to stave off damage from the Brexit, deepening a tax cut that was already in the works.

The Bank of England, the U.K.’s central bank, also lowered regulations on British banks earlier this month to spur greater lending.

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