Factory sector contracts at fastest pace in 2 years

LONDON Tue Nov 1, 2011 9:29am GMT

LONDON (Reuters) - The manufacturing sector contracted at its fastest pace in more than two years in October as new orders plummeted, adding to signs that the country is teetering on the brink of recession, a survey showed on Tuesday.

The Markit/CIPS Manufacturing Purchasing Managers' Index (PMI) slumped to 47.4 in October, its lowest since June 2009, from a downwardly revised 50.8 the month before.

Many companies only maintained their activity by substantially reducing backlogs.

A Reuters poll had predicted a far gentler fall to 50.0 -- the level that divides growth from contraction -- and none of the 30 economists surveyed had predicted such a dramatic tumble.

The numbers provide grim reading for policymakers and politicians, coming just ahead of data expected to show the economy grew a lacklustre 0.4 percent last quarter having basically flatlined in the previous nine months.

"The UK manufacturing PMI fell sharply back into contraction territory in October. The most worrying aspect of the survey is the trend in new orders, which declined at the quickest pace since March 2009," said Rob Dobson, senior economist at data compiler Markit.

New orders in the sector, once the bright spot in Britain's lacklustre recovery, plunged last month having briefly returned to growth in September.

The sub-index sank to 44.1 from 50.3 as exports fell for the third consecutive month, hurt by a raging debt crisis in the euro zone, the destination for about half of UK exports, and slowing growth in the world's biggest developed economies.

CUT BACK CUT-BACKS

The coalition government has come under increasing pressure to rein in its deficit-cutting plans and instead introduce measures to boost growth.

The Bank of England has already launched a second round of quantitative easing, pumping an additional 75 billion pounds into the economy, and BoE policymakers have warned the country risks slipping into another recession.

A Reuters poll last month saw economists giving a median one-in-three chance the country will head into another recession in the next 12 months.

The PMI survey showed output contracted for the second time in three months.

Factories also trimmed workforces for the fourth month running in a bid to cut costs and remain profitable, heralding further dire news from the labour market after unemployment hit a 17-year high in the three months to August.

Inflation rose to a three-year high in September of 5.2 percent, well above the central bank's 2 percent target.

The PMI survey showed prices charged rose at their slowest pace since August 2009 while input prices rises also eased, supporting the BoE's view that inflation is set to drop sharply early next year when one-off effects such as an increase in value-added taxes fall out of the equation.

"The sole bright spot from the survey was the further easing in inflationary pressures that has accompanied the weaker performance of the sector, as input costs and output prices both rose at the slowest rates for around two years," Dobson said.

(Editing by Susan Fenton)

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