Manufacturing downturn highlights recovery risks

LONDON Thu Nov 1, 2012 11:58am GMT

LONDON (Reuters) - The downturn in Britain's manufacturing sector worsened in October as companies received fewer orders and costs rose at a faster pace, a survey showed on Thursday, ending a run of more hopeful data on the economy.

The CIPS/Markit Purchasing Managers' Index PMI.L for the manufacturing sector fell to 47.5 from a downwardly revised 48.1 in September, dipping further below the 50 mark which separates growth from contraction.

The figure was also well below economists' forecasts of 48.0 and, after positive surprises from third quarter growth numbers and retail and credit figures, it reopened the debate about the Bank of England wading in with more economic stimulus this month.

"It won't swing the QE.L decision massively, it's going to be a close call whatever way you look at it and inflation risks have moved up and certainly that will be something the committee are going to look at pretty closely," said Investec economist Victoria Clarke.

British government bonds pared some losses after the data, though they continued to underperform their German equivalents as investors took a speech from BoE deputy governor Charlie Bean as a sign that the appetite for more stimulus was fading.

The UK economy is still struggling to break a cycle of poor growth and recession, plagued by the biggest budget cuts in half a century and the debt turmoil which has hammered its trading partners in the euro zone.

After figures last week showed the economy grew a full 1 percent in the third quarter, however, several analysts switched to forecast the BoE would not approve a new round of government bond purchases at next week's policy meeting.

But the PMI data on Thursday showed manufacturers cut production for a fourth month in a row and new orders fell at a faster rate than in September as export demand dwindled.

"While the road to an export-led recovery is still blocked by the ongoing difficulties in the euro zone, it is concerning to hear further reports of the global slowdown hurting trade with other regions such as Asia," Markit economist Rob Dobson said.

DOMESTIC HOPES

However, Dobson also pointed to some positive signs.

"The consumer goods sector bounced back robustly in October to really buck the wider trend," he said. "This chimes with ongoing signs that domestic retail sales volumes are holding up reasonably well."

Britain's manufacturing sector grew by 1.0 percent between July and September as the industry made up for production lost in June due to an extra public holiday.

A survey by lender Nationwide showed that house prices posted an unexpectedly strong rise in October, adding to signs that the housing market was at least stabilising.

But while the country exited recession in the third quarter, most economists expect a feeble recovery from here on at best, as the turmoil in the euro zone continues to weigh and the slowdown in emerging economies like China poses fresh dangers.

Business lobby CBI raised its forecast slightly for this year and next on Thursday, after the bounce in the third quarter, predicting overall stagnation in 2012 and 1.4 percent growth in 2013.

But BoE policymakers have cautioned that the strong growth seen in the third quarter was unlikely to be repeated.

In a worrying sign for the central bankers, manufacturers' costs rose at the fastest pace since March. Firms also increased their prices, but at a much slower rate than costs rose.

The central bank has been hoping that falling inflation will allow British consumers to spend more and support the economy.

But recent energy and food price increases have stoked fears that the inflation rate -- currently at 2.2 percent -- will not fall further towards the central bank's 2 percent target. (Additional reporting by Olesya Dmitracova and Li-mei Hoang; editing by Patrick Graham)

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