Bloomberg News

U.K. Manufacturing Contracts Most in More Than Two Years

September 01, 2011

(Updates with U.S. factory data starting in third paragraph.)

Sept. 1 (Bloomberg) -- U.K. manufacturing shrank the most in more than two years in August as demand from domestic and overseas customers weakened.

A gauge by Markit Economics and the Chartered Institute of Purchasing and Supply fell to 49, the lowest in 26 months, from 49.4 in July, according to an e-mailed report in London today. That matched the median forecast of 27 economists in a Bloomberg News survey. A level below 50 indicates contraction. New orders fell the most in almost 2 1/2 years and employment declined for the first time in 17 months.

Manufacturers said the drop in demand was due to weaker domestic and export sales and “rising global economic uncertainty.” While data today showed U.S. manufacturing unexpectedly expanded in August, figures from Europe and Asia showed a broader factory slowdown may be unfolding.

“The sudden and substantial drop in new export orders is particularly worrisome,” Markit economist Rob Dobson said in a statement. “As consumer and business confidence are slumping both at home and abroad, it is hard to see where any near-term improvement in demand will spring from.”

The pound fell against the dollar and traded at $1.6135 as of 3:34 p.m. in London, down 0.7 percent from yesterday.

Price Pressures

The pace of increases in input and output prices eased in August, Markit said. Input costs rose at the slowest pace for 20 months, while factory-gate prices posted their smallest increase since November.

The drop in manufacturing employment, the first in 17 months, suggests producers are “increasingly cautious in their outlook and seeking to cut costs where possible,” Dobson said.

The British Chambers of Commerce lowered its U.K. growth forecast today as the U.S. recovery slows, Europe’s debt crisis weighs on the economy and Britain’s government implements the biggest fiscal squeeze since World War II. Separate reports this week showed consumer sentiment fell for a third month in August and house prices dropped the most since October.

The Bank of England’s Monetary Policy Committee is holding off raising interest rates from a record low of 0.5 percent as a faltering economic recovery outweighs the risk of inflation that is more than double its target. The central bank will keep the rate on hold until August 2012, when it will raise it by 25 basis points, BCC Chief Economist David Kern said today. The London-based lobby group had previously forecast that the bank would increase the rate this year.

U.S. Manufacturing

The BCC sees U.K. gross domestic product rising 1.1 percent this year and 2.1 percent in 2012, down from a June projection for 1.3 percent and 2.2 percent respectively.

U.S. manufacturing unexpectedly expanded in August, showing that the two-year economic recovery may be sustained. The Institute for Supply Management’s factory index fell to 50.6 last month, the lowest level since July 2009, from 50.9 in August, the Tempe, Arizona-based group said today. Economists projected the gauge would drop to 48.5, according to the median forecast in a Bloomberg News survey.

The report contrasts with other national and regional factory surveys published today that showed manufacturing shrank in the euro area, Russia and Taiwan last month, while growth slowed in Switzerland. A gauge of the industry in China hovered near its weakest point in 29 months as exports declined.

“With key trading partners slowing into the second half of 2011, that raises the real risk of sharply weaker manufacturing production,” said David Tinsley, an economist at BNP Paribas SA in London. “With U.K. consumers also struggling against the onslaught of higher inflation, fiscal tightening and slow earnings growth, it all adds up to a scenario for a further deterioration in U.K. growth prospects.”

--Editors: Fergal O’Brien, Eddie Buckle

To contact the reporter on this story: Scott Hamilton in London at shamilton8@bloomberg.net

To contact the editor responsible for this story: Fergal O’Brien at fobrien@bloomberg.net


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