UK manufacturing contraction eases

LONDON Mon Dec 3, 2012 2:11pm GMT

Employees of JJ Churchill precision engineering polish turbine blades in the company's factory in Market Bosworth, central England, October 10, 2012. REUTERS/Tom Bergin

Employees of JJ Churchill precision engineering polish turbine blades in the company's factory in Market Bosworth, central England, October 10, 2012.

Credit: Reuters/Tom Bergin

LONDON (Reuters) - British manufacturing activity shrank less than expected in November but remains fragile, surveys showed on Monday, just two days before Chancellor George Osborne presents a half-yearly budget statement.

Weak growth means public borrowing is not falling as Osborne planned earlier this year, and initial figures from a flagship Bank of England scheme to boost lending also released on Monday suggest any big benefit from this source is several months away.

Many economists expect Osborne will present figures on Wednesday showing he is no longer on track to meet the politically sensitive target of putting Britain's debt burden on a downward path by the time of the next election in 2015. That in turn could endanger Britain's triple-A credit rating, which Osborne has promised to defend vigorously.

The monthly Markit/CIPS survey of purchasing managers in the manufacturing industry confirmed the tentative nature of any recovery as the economy emerges from nine months of recession.

The PMI index jumped to 49.1 - its highest level since August - from October's downwardly revised 47.3. That beat the median forecast of 48.0 in a Reuters poll of economists and exceeded even the highest prediction of 48.9.

But the index is still below the 50 mark that separates growth from contraction, where it has been since April.

"We are getting closer to the 50 level, so it is moving in the right direction, but it goes to confirm our view that UK economic activity in the fourth quarter remains sluggish and the immediate prospects don't look particularly bright," said Peter Dixon, economist at Commerzbank.

In a separate survey, members of the EEF manufacturing trade association reported stagnant output over the past quarter - the weakest reading since late 2009 when the country was recovering from its deepest recession in more than 50 years.

SLUGGISH RECOVERY

Britain has suffered two recessions in the past four years, despite the Bank of England slashing interest rates to a record low of 0.5 percent and creating 375 billion pounds of new money - equal to around a quarter of GDP - to boost economic growth.

The BoE launched its Funding for Lending Scheme at the start of August, offering banks cheap finance if they in turn lend on to households and businesses, aiming to boost the economy in ways that its quantitative easing bond purchases have failed to.

British banks and building societies drew down 4.36 billion pounds from the programme in its first two months, in what analysts said was a moderately encouraging start.

But the economy is still only seen growing by a tepid 0.1 percent in the current quarter, with little pick-up predicted over the next year. Recovery has been hampered by a drawn-out debt crisis in the euro zone, Britain's main trading partner, as well as by the government's tough austerity plans.

Osborne said on Sunday that closing the budget gap was taking longer than planned, but insisted he would stick with the deficit-reduction programme when he presents his half-yearly fiscal statement on Wednesday.

He declined to comment on whether he would be able to meet debt and deficit reduction targets, but stressed he did not believe Britain should borrow more or increase spending.

British media reported on Sunday that Osborne planned to reduce the amount very high earners can put tax-free into private pensions alongside reining in the welfare budget.

The Conservative-led government's failure to deliver a strong recovery is its biggest political problem and polls show the Labour party would regain power if an election were held now.

Osborne blames most of Britain's slow recovery on weakness in the euro zone, although his critics say excessive austerity at home is to blame.

A euro zone manufacturers' survey also released on Monday showed a contraction in manufacturing activity eased to an eight-month low in November, although a meaningful recovery still looks a long way off.

Further afield, China's economy picked up in November but activity elsewhere in Asia was subdued as demand from the developed world remained depressed.

New orders placed with British factories fell for the second month, with the index coming in at 49.7, albeit well up from October's 47.7. New export orders fell in all but two months this year as global economic uncertainty rumbles on.

In a worrying sign for central bankers who hoped that easing inflation would help consumers spend more, manufacturers hiked their prices at the fastest pace since June, despite input costs rising at their slowest pace in three months.

Factories also cut their workforce again in November.

In contrast, a PMI poll due on Wednesday is expected to show that growth in Britain's dominant services sector picked up pace in November.

"We'll need to wait for Wednesday's service sector PMI to firm the picture but, with the temporary factors that boosted growth over the summer unwinding, it seems likely that the economy will contract in the fourth quarter," said Rob Wood, economist at Berenberg Bank.

(Additional reporting by Li-mei Hoang, Peter Schwartzstein and David Milliken; Editing by Catherine Evans)