Bloomberg News

U.K. Manufacturing Slump Deepens as Export Orders Fall: Economy

August 01, 2012

U.K. Manufacturing Slump Deepens as Export Orders Fall

British manufacturers are struggling as the sovereign debt crisis deepens in Europe, the U.K.’s biggest trading partner, and global growth cools. Photographer: Chris Ratcliffe/Bloomberg

U.K. manufacturing shrank the most in more than three years in July as export orders slumped, indicating the economy’s recession continued to deepen at the start of the third quarter.

A factory-output gauge fell to 45.4 from a revised 48.4 in June, London-based Markit Economics said today. The reading was weaker than any of the 30 forecasts in a Bloomberg News survey. The decline was led by weaker demand in the euro area, where a separate index showed manufacturing shrank for a 12th month.

British manufacturers are struggling as the sovereign debt crisis deepens in Europe, the U.K.’s biggest trading partner, and global growth cools. The Bank of England, which expanded stimulus last month, will probably keep its bond-purchase target unchanged tomorrow as policy makers assess their Funding for Lending plan aimed at stoking the flow of credit and reviving growth.

“There is a lot of ground to recover,” said Ross Walker, an economist at Royal Bank of Scotland Group Plc in London. “Alongside distinctly underwhelming anecdotal evidence from consumer-facing parts of the economy, this bodes ill for hopes of a rebound in third-quarter gross domestic product.”

Economists had forecast a reading of 48.4 for the factory index, based on the median estimate. A reading below 50 indicates contraction.

Pound Weakens

The pound weakened after the report, which adds to concerns about Britain’s economy after it shrank 0.7 percent in the second quarter. Sterling traded at $1.5647 as of 10:54 a.m. in London, down 0.2 percent from yesterday. It was at 78.68 per euro, 0.3 percent lower on the day.

Part of the U.K. weakness in July may reflect a delayed effect of an extra public holiday in June, according to Nomura International Plc. Still, it said it’s “clear that the underlying level of growth remains very weak.”

In the 17-nation euro region, the manufacturing gauge fell to a 37-month low of 44 last month from 45.1 in June. The gauges for Germany and France -- the bloc’s biggest economies --reached 37- and 38-month lows, respectively.

European manufacturers are feeling the impact of the debt crisis and tougher austerity measures that have undermined export and consumer demand. Euro-area economic confidence dipped in July and German unemployment rose for a fourth straight month, according to reports this week.

Recovery Delayed

In Germany, production dropped for a fourth month in July, with output and new orders declining at the sharpest rates since April 2009, Markit said in a separate report. Ireland’s central bank said yesterday that the euro-area economy probably shrank in the second quarter after stalling in the previous three months.

“The widespread deterioration in sentiment and the high levels of uncertainty threaten to further delay the gradual recovery forecast for the second half of this year,” the Dublin-based bank said.

The economic gloom extends to Asia, where China’s manufacturing teetered on the edge of contraction in July. The Purchasing Managers’ Index in China unexpectedly fell to 50.1 in July, the weakest in eight months, from 50.2 in June, a government report showed today.

A separate purchasing managers’ index by HSBC Holdings Plc and Markit indicated that manufacturing contracted at a slower pace in July. The gauge, which covers more than 420 companies and is weighted more toward smaller businesses, rose to 49.3 from 48.2, after a preliminary reading of 49.5 last week.

U.S. Output

In the U.S., manufacturing probably stagnated in July after contracting for the first time in three years the previous month, economists said before a report later today. The Institute for Supply Management’s factory index rose to 50.2 from 49.7, according to the median estimate in a survey.

The International Monetary Fund cut its 2013 global growth forecast to 3.9 percent from 4.1 percent last month, citing Europe’s fiscal crisis and slowing activity in emerging markets. It also predicted the euro-area economy to shrink 0.3 percent this year before expanding 0.7 percent in 2013.

With economies around the globe cooling, central bankers are under pressure to add fresh stimulus measures. Policy makers from the Federal Reserve, the European Central Bank and the Bank of England all meet this week.

‘Whatever It Takes’

ECB President Mario Draghi said last week that policy makers will “do whatever it takes” to preserve the euro, signaling they may intervene in bond markets again. The central bank, which cut borrowing costs to a record last month, will hold its next rate meeting tomorrow.

As European governments from Spain to Ireland seek ways to plug their budget gaps, companies may continue to cut jobs. Euro-area unemployment may reach 12 percent next year from a current rate of 11.2 percent, according to IHS Global Insight.

ThyssenKrupp Steel Europe AG, Germany’s biggest steelmaker, said on July 26 that it would introduce shortened shifts for workers from August due to “ongoing weak orders,” at least until the end of the year. Siemens AG (SIE), Europe’s largest engineering company, said the same day that reaching its full- year targets had become more difficult after fiscal third- quarter earnings and sales fell short of analysts’ estimates.

The euro-area had a “poor start to the third quarter and the weak new orders component suggests no signs of an imminent turnaround,” said Stella Wang, an economist at Nomura in London. “Absent a quick response from the policy makers, output is likely to fall at a worrying rate, especially for the major economies.”

To contact the reporter on this story: Jennifer Ryan in London at jryan13@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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