Factory output shrinks

By Fiona Shaikh and Sumeet Desai

LONDON (Reuters) - Manufacturing output fell unexpectedly in May, denting hopes the economy has already returned to growth and raising expectations policymakers will have to do more to stimulate a recovery.

Tuesday's data heightened concern the economy is still some way from a durable recovery and boosted speculation Bank of England policymakers will vote to expand their 125-billion pound quantitative easing scheme at their monthly meeting this week.

The Office for National Statistics said factory output fell by 0.5 percent in May, confounding forecasts for a 0.2 percent rise. And an initially reported 0.2 percent rise in April was revised away to nothing.

The wider industrial output measure, which includes energy production and accounts for almost a fifth of economic output, fell 0.6 percent on the month after a downwardly revised 0.2 percent gain in April.

The data knocked the pound lower as it dashed expectations the economy had rebounded in the second quarter after suffering its steepest fall in 50 years in the first three months of the year.

It also prompted academics at the National Institute of Economic and Social Research to revise their view that the economy hit its lowpoint in March. NIESR estimates GDP fell 0.4 percent in the second quarter and that the economy is now stagnating.

But Treasury minister Liam Byrne reiterated the government's forecast for growth to return by the end of this year.

"We have seen some tentative signs that output is stabilising ... but we remain cautious about the prospects for the economy," Byrne said in a statement.