Bloomberg News

U.K. Manufacturing Surges as Euro-Area Recovery Builds

September 02, 2013

U.K. Factory Index Rises

A sewing machine sews a British Union flag onto a section of New Balance Athletic Shoe Inc. trainer during the manufacturing process at the company's factory in Flimby. Photographer: Matthew Lloyd/Bloomberg

A U.K. factory index increased to a 2 1/2-year high in August, while a pickup in Italy and Spain helped euro-area manufacturing expand faster than initially estimated, evidence the region’s recovery is building momentum.

The British gauge climbed to 57.2 from 54.8 in July, Markit Economics said today in London. That’s above the 50 level signaling growth. Markit’s euro-area factory measure rose to 51.4 from 50.3 in July, it said, above an estimate of 51.3 published on Aug. 22. Two indexes of manufacturing in China also rose in August.

Strengthening global factory activity is helping exports and the U.K. improvement suggests the economy picked up momentum into the third quarter after gross domestic product grew 0.7 percent in the previous period. The Bank of England will probably keep policy unchanged this week amid growing investor doubts that Governor Mark Carney and officials can keep the benchmark interest rate at a record low for three years.

“Third-quarter GDP growth looks set to improve on the 0.7 percent rate recorded in the second quarter, with the orders figures suggesting this momentum will be carried through into the fourth quarter,” said James Knightley, an economist at ING Bank NV in London. “We struggle to see bank rate remaining at 0.5 percent for the next three years.”

China’s manufacturing strengthened last month, with one index posting its biggest jump in three years. An official Purchasing Managers’ Index jumped more than estimated to a 16-month high of 51.0, a government report showed yesterday in Beijing. A separate PMI released today by HSBC Holdings Plc and Markit advanced to 50.1 last month from 47.7 in July, the largest gain since 2010.

Euro-Area Recovery

Markit’s euro-area data today showed factory output in Italy accelerated in August at the fastest pace in 28 months, while Spanish manufacturing expanded in August for the first time in more than two years.

In the U.S., where markets are closed today, data last month showed manufacturing expanded in July at the fastest pace in more than two years.

Economists had forecast that Markit and the Chartered Institute of Purchasing and Supply’s U.K. factory index would increase to 55 from a previously reported 54.6, according to the median of 26 estimates in a Bloomberg News survey.

The strength of the British recovery is leading investors to add to bets the BOE will be forced to tighten policy sooner than it has projected. Officials pledged last month not to raise the key interest rate until unemployment falls to 7 percent, something they don’t see happening until the end of 2016. The jobless rate was 7.8 percent in the second quarter.

Pound, Gilts

The pound advanced to the strongest level versus the euro in more than two months after the report, and rose for the first time in five days against the dollar. The yield on 10-year U.K. government bonds increased to a two-year high.

A report from Hometrack Ltd. today showed U.K. house-price growth accelerated in August amid the strongest market conditions for six years as demand continued to outpace the number of homes for sale. In a separate report, the Engineering Employers’ Federation raised its forecasts for U.K. economic growth and manufacturing output.

Separate data from the BOE showed net lending through its Funding for Lending Scheme rose 1.6 billion pounds ($2.5 billion) in the second quarter, led by Lloyds Banking Group Plc (LLOY) with a 1.3 billion-pound expansion.

British factory output and new orders gained at their fastest pace since 1994, while cost pressures built amid rising raw-material prices, Markit said. The report showed manufacturing activity expanded for a fifth consecutive month and at the fastest rate since February 2011.

‘Booming Again’

“The U.K.’s factories are booming again,” senior Markit economist Rob Dobson said in the report. “Orders and output are growing at the fastest rates for almost 20 years, as rising demand from domestic customers is being accompanied by a return to growth of our largest trading partner, the euro zone.”

Average house values in England and Wales rose 0.4 percent after a 0.3 percent gain in July, property researcher Hometrack said in its report. Prices were up 1.8 percent from a year earlier, the most since July 2010.

A survey by the EEF and accountancy company BDO LLP showed British factory output rose to a three-year high in the third quarter, with a gauge of production rising to 32 from 12. The EEF raised its forecast for manufacturing growth in 2014 to 2.1 percent from 1.9 percent, following a 0.5 percent contraction this year. It also raised its forecast for U.K. gross domestic product growth to 1.2 percent this year and 2 percent next year, versus earlier projections of 1.1 percent and 1.8 percent.

‘Brightened Considerably’

“Industry’s prospects have brightened considerably,” Lee Hopley, chief economist at the EEF, said in a statement. “There is growing confidence that improving trading conditions will continue into the final months of this year and then accelerate through the gears in 2014.”

The pound appreciated 0.5 percent to 84.88 pence per euro at 11:47 a.m. London time after reaching 84.72 pence, the strongest level since June 26. Sterling rose 0.5 percent to $1.5582. Benchmark 10-year gilt yields climbed eight basis points, or 0.08 percentage point, to 2.85 percent after reaching 2.87 percent, the highest since Aug. 1, 2011.

The BOE’s Monetary Policy Committee will leave its bond-purchase plan at 375 billion pounds, according to all 38 economists in a Bloomberg News survey. Officials will also keep the key interest rate at 0.5 percent, according to a separate poll. The bank will announce the decisions at noon in London on Sept. 5.

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

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


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