UK manufacturing shrinks for second month

LONDON Tue Apr 2, 2013 10:21am BST

A worker removes sheets of tissue paper from a machine in a workshop at the Middleport pottery in Stoke-on-Trent, central England January 22, 2013. REUTERS/Phil Noble

A worker removes sheets of tissue paper from a machine in a workshop at the Middleport pottery in Stoke-on-Trent, central England January 22, 2013.

Credit: Reuters/Phil Noble

LONDON (Reuters) - Britain's manufacturing activity shrank for a second consecutive month in March, a survey showed on Tuesday, leaving the country's more resilient services sector as the best hope of avoiding a new recession.

The Markit/CIPS manufacturing purchasing managers' index came in at 48.3, only slightly above February's surprisingly poor reading of 47.9, and a touch weaker than the consensus forecast.

The output component of the survey fell in March at its fastest pace since October. There were signs of weakness in the key housing market too.

While lending to Britain's consumers ticked up in February, the number of mortgage approvals for house purchases fell for a second month, Bank of England data showed. Nonetheless, the value of home-backed lending rose.

But there was better news from the country's largest business survey which showed that export orders with British firms rose strongly in the first three months of 2013 and confidence about the next 12 months picked up.

The Markit PMI survey suggests that manufacturing exerted an even bigger drag on growth between January and March than it did in the fourth quarter of 2012, when it accounted for a third of the economy's 0.3 percent contraction.

"The onus is now on the far larger service sector to prevent the UK from slipping into a triple-dip recession," said Rob Dobson, senior economist at Markit.

Official GDP data for the first quarter won't be released until April 25 but the evidence so far suggests a strong risk that Britain will record a second consecutive quarter of contraction - the technical definition of recession.

A third recession in less than five years would be an embarrassment for the government which is sticking to tough austerity measures.

"All this still points to a very subdued economy, which will keep the pressure on the BoE to do more to offset the UK's tight fiscal stance," said James Knightley, an economist with ING, referring to Tuesday's data. "However, our central case remains for a no-change decision this week."

The Bank of England's policymakers meet on Wednesday and Thursday. More action, possibly in the form of renewed government bond-buying or quantitative easing, is only expected later this year.

"We don't think that that is going to be sufficient to push the (bank) into the sanctioning QE as soon as this week," said Philip Shaw, an economist with Investec. "But nonetheless, the committee can't be altogether happy with some of these indicators which have shown the economy remaining in uncertain mode."

The Markit report blamed the poor performance of manufacturing in March on tough market conditions, subdued client confidence and ongoing bad weather.

New orders from abroad contracted for the 15th month running in March. The survey blamed the fall on weak demand from Europe and strong competition in U.S. and South Asian markets.

In further bad news for UK policymakers, there were also signs that inflation pressures were picking up. Output prices rose at the fastest pace in three months while input prices picked up sharply, driven by the weakness of sterling and higher energy and food costs.

Manufacturing accounts for around a fifth of British economic output. Surveys of the construction and service sectors for March are due to be released on Wednesday and Thursday respectively.

There have been signs that the services sector is faring better than manufacturing. It grew at its fastest pace in five months in February, according to Markit and official data showed it notched up its best performance in January for five months.

(Additional reporting by Olesya Dmitracova, Oxana Andrienko and Li-mei Hoang. Editing by Jeremy Gaunt.)

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