UK factory slump raises doubts

Britain's manufacturing sector shrank at its fastest rate in more than three years in July, the latest PMI survey showed on Wednesday, dealing a blow to hopes the country may come out of recession over the summer.

The grim figures fuelled expectations that the Bank of England will add further stimulus once its current 50 billion pound ($78.3 billion) plan to buy government bonds with newly created money ends in November.

Britain slipped into its second recession in four years around the turn of the year, and the economy contracted by a further 0.7 percent from April to June due to government spending cuts, euro zone turmoil, bad weather and an extra public holiday.

Many economists have been betting that some of the output lost will be recovered in the third quarter, but the Markit/CIPS Manufacturing Purchasing Managers' Index's (PMI) drop to 45.4 from a downwardly revised 48.4 in June pointed to another contraction.

It was the lowest reading since May 2009, further off the 50 mark that separates contraction from growth and well below even the most pessimistic forecast of any economist surveyed by Reuters.

Sterling fell to a two-week low against the euro and dropped sharply against the dollar while gilts pared gains after the figures.

“Pretty terrible, surprisingly bad,” Tom Vosa, an economist at National Australia Bank, said about the PMI figures. “Ultimately, this puts more pressure on the (Bank of England) to cut Bank Rate, and certainly the government now has to hope that its Funding for Lending Scheme really comes good,” he said.

CRISIS

Britain's economy has not yet recovered the output lost during the 2008/2009 slump, and the renewed recession comes at a time when many Britons are seeing their finances squeezed by rising prices and higher taxes, eating away measly wage rises.

“The domestic market shows no real signs of renewed life, while hopes of exports charting the course to calmer currents were hit by our main trading partner, the euro zone, still being embroiled in its long-running political and debt crises,” said Markit economist Rob Dobson.

The PMI survey showed that export orders fell at the sharpest rate since the height of the financial crisis in February 2009, and the output index slumped to 43.3 from 51.9.

“Companies scaled back output to the greatest extent since March 2009, as underlying demand remained weak and market conditions highly competitive,” Dobson said. “It looks like the sector remains a major drag on the overall economy.”

The ongoing slump in manufacturing is also keeping the pressure on the government to come up with measures to support the economy after it announced a raft of steps to get credit flowing to businesses and consumers.

The government's scheme to get credit flowing through the economy officially started on Wednesday.

“But of course, if you are a lender in the UK and you are looking at this economy, why would you necessarily want to extend credit?,” Vosa from National Australia Bank said.

Tight credit together with a lack of consumer confidence has been a major drag on Britons economy, hitting the housing market particularly hard.

House prices in Britain fell at their fastest annual pace in nearly three years in July, mortgage lender Nationwide said.

The PMI survey showed that companies' cost pressures continued to ease as prices for chemicals, oil, metal, paper and plastics fell, Markit said. But firms still hiked their selling prices, Markit said.

Consumer price inflation has fallen sharply in recent months and the British Retail Consortium said on Wednesday shop prices rose at the slowest pace in more than 2-1/2 years in July.

Despite the sharp fall in activity, companies hired more staff for the first time since April. “Staffing levels had risen to complete outstanding contracts and as part of planned company expansions,” Markit said. - Reuters