(Updates with comment from economist in fourth paragraph, pound in fifth.)
June 1 (Bloomberg) -- U.K. manufacturing grew at the slowest pace in almost two years in May as weak domestic demand led to a drop in production and new orders, a survey showed.
A gauge based on a survey by Markit Economics and the Chartered Institute of Purchasing and Supply declined to 52.1, the lowest since September 2009, from a downwardly revised 54.4 in April, according to an e-mailed report in London today. Output and new orders fell for the first time since the middle of 2009, and producers of consumer goods and smaller manufacturers were hit hardest.
The biggest government spending cuts since World War II are hurting consumer confidence, while accelerating inflation is squeezing incomes. Holidays for Easter and the royal wedding at the end of April and the impact of the Japanese earthquake and tsunami also hurt company orders.
“The fact that the output and new orders fell for the first time in two years does raise questions about where economic growth will come from,” Hetal Mehta, an economist at Daiwa Capital Markets Europe in London, said in an e-mailed note. “With that in mind, it is difficult to see how the Bank of England will be able to increase interest rates this year.”
The pound erased its gain against the dollar after the report and traded at $1.6415 as of 10:34 a.m., down 0.2 percent from yesterday. The yield on the 10-year gilt was little changed at 3.30 percent after earlier rising to 3.31 percent.
The decline in the manufacturing index last month was bigger than economists had forecast in May. They had predicted a reading of 54.1, according to the median of 26 estimates in a Bloomberg News survey. A measure above 50 indicates expansion. Still, employment rose for a 14th month.
Higher commodity prices are squeezing companies’ profit margins. Prices at factory gates rose to a near-record due to higher costs for raw materials such as chemicals, energy, food, fuel, metals, paper, plastics and timber, the report showed.
Separate reports today showed factory growth in the euro area slowed more than initially estimated in May, while in China, it expanded at the weakest pace in nine months.
The Bank of England kept its benchmark interest rate at a record low of 0.5 percent last month and Governor Mervyn King said on May 11 the U.K. faces a “difficult time ahead.” Britain’s economy expanded 0.5 percent in the first quarter, barely enough to erase the contraction in the final three months of last year.
“Domestic market weakness was the main drag on order books and output,” Rob Dobson, senior economist at Markit, said in the statement. “This was exacerbated by the additional bank holidays in late April, which fell during the early part of the latest survey period, and ongoing supply-chain disruption following the Japanese earthquake.”
--Editors: Fergal O’Brien, Eddie Buckle
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