UK manufacturing contracts again, stimulus to come

A steel slab is cooled with water on the roller table at the SSI steel plant at Redcar, northern England May 29, 2012.

LONDON (Reuters) - Britain's manufacturing sector contracted for the second straight month in June as new orders continued to fall, a survey showed on Monday, cementing expectations the Bank of England will pump more cash into the recession-hit economy.

The country fell back into recession around the turn of the year and a string of weak economic data has pointed to another quarter of contraction between April and June, putting pressure on the central bank and the government to boost growth.

The Markit/CIPS closely watched Purchasing Managers' Index (PMI) rose to 48.6 last month from May's three-year low of 45.9, beating expectations for a more modest climb to 46.5.

But it was still the second month below the 50 mark that divides growth from contraction.

"These figures imply that manufacturing was a drag on overall growth in the second quarter and we expect GDP to decline for the third consecutive quarter," said Nida Ali, economist at Ernst & Young ITEM Club.

"The Bank was already leaning heavily towards extending QE this week and these figures will provide further pressure," she added.

With economists seeing tepid growth ahead at best, and only a mild bounce next quarter from London's hosting of the Olympic Games and the subsequent tourism and ticket sales, the BoE is widely seen restarting its quantitative easing (QE) asset purchase programme.

The Bank is expected to top up the 325 billion pounds of cash it has already pumped into markets with another 50 billion when it meets on Thursday as falling inflation gives it more scope to support the battered economy.

Britain's economy contracted 0.3 percent in the first three months of the year and having shrunk at the end of 2011 is deemed to be in recession.

In a further sign of the weak state of the economy, official data showed on Friday that the country's dominant service sector stagnated in April.

A sister PMI survey for services firms due on Wednesday is expected to show the sector, which accounts for three quarters of Britain's output, barely grew last month.

"The underlying position of the economy is still pretty weak," said Ross Walker at RBS who sees an additional 50 billion pounds of QE on Thursday.

"If you look through the noise in the surveys and other data, which are a bit mixed, it's telling you that, at best, the economy will grow very slightly in the second half of this year, and we could even have an ongoing contraction."

Markets were little moved but the data will raise the pressure on the Conservative-led coalition government, which is pressing ahead with tough austerity measures to reduce a record deficit, to step up efforts to support the economy.

The government has introduced measures to get credit flowing through the economy and has vowed to do more to boost house building and infrastructure spending, though many economists think proper fiscal stimulus might be needed.

ORDER FALL

With the new orders index holding sub-50 for the third month running at 47.0, albeit up from May's three-year low of 42.0, the situation is unlikely to improve anytime soon.

The survey also showed that for the sixteenth month some of the moderate activity was driven by firms running down old orders and that they were cutting staffing levels to reduce costs.

Export orders declined for the third month as the debt crisis rages on through the euro zone, Britain's main trading partner.

BoE Governor Mervyn King said last week Britain's economic outlook had worsened markedly in the space of just six weeks due to the deepening euro zone crisis and signs that a global slowdown is taking root in the United States and emerging markets.

(Additional reporting by Sven Egenter; Editing by Jeremy Gaunt.)