May 7, 2008 / 12:06 PM / 12 years ago

Manufacturing drop adds to UK economy worries

LONDON (Reuters) - British manufacturing output fell in March at its sharpest rate in six months as a drop in car production led a broad-based retreat after a strong start to the year.

The surprise decline suggests Britain’s economy may be set for a broad-based slowdown, with manufacturing unable to compensate for a rapidly weakening consumer sector.

The pound fell on speculation the Bank of England might even cut interest rates on Thursday. Most analysts expect a cut next month.

“It is another soft economic reading for March and suggests the slowing in the economy is gaining traction,” said George Buckley, chief UK economist at Deutsche Bank.

The Office for National Statistics said manufacturing output fell 0.5 percent in March. This was the weakest since last September and compared with analysts’ forecasts of an unchanged reading.

The wider measure of industrial production also fell by 0.5 percent, its sharpest monthly fall in more than a year

Other things being equal, the figures would shave 0.02 percentage points off the preliminary estimate of gross domestic product growth in the first quarter.

RATE OUTLOOK

Most economists expect Britain’s central bank to hold fire on interest rates this week and cut them in June, when it will have had more time to assess the economic situation.

The Bank cut rates last month to 5 percent. Back-to-back rate cuts might give the impression it was taking its eye off inflation — a risky strategy at a time when oil prices are vaulting to record highs above $122 a barrel.

The drop in manufacturing output in March followed several months of surprisingly strong figures and it is too early to say that the trend has turned.

Nevertheless, surveys of manufacturing are already painting a softer picture and the economic newsflow from other parts of the economy has turned decidedly gloomy.

Britain’s service sector grew last month at its weakest rate in five years while house prices, according to the country’s biggest mortgage lender, fell at their fastest annual rate in 15 years.

Second-tier data released earlier on Wednesday provided little cheer. A survey by the Nationwide building society showed British consumer morale had fallen to its lowest level since records began four years ago while a report by REC/KPMG showed permanent job placements fell in April for the second time in three months.

“Three releases this morning join the chorus of data in recent weeks that have been uniformly weaker than expected,” said Allan Monks at JPMorgan.

“Given that the market has not moved to price in a cut at tomorrow’s MPC meeting, our call that they go looks finely balanced but this morning’s sharp drop in industrial production, consumer confidence and labour market activity strengthen the case for a policy easing.”

Editing by David Christian-Edwards

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