LONDON (Reuters) - British manufacturing output fell in January at the fastest pace since June, reinforcing fears that the economy has tipped into its third recession since the 2008 financial crisis.
The decline in manufacturing, and downbeat GDP estimates from a respected thinktank, will add to pressure on Chancellor George Osborne to come up with measures to revive growth in his annual budget next week.
Britain’s economy contracted in late 2012, endangering the government’s plans to bring its spending in line with its earnings and contributing to the loss of the country’s prized triple-A credit rating.
If economic activity shrinks again this quarter - as looks increasingly likely - Britain will be back in recession.
The National Institute of Economic and Social Research (NIESR), which last month predicted that Britain would avoid a triple-dip recession, said on Tuesday it was now a close call.
It estimated the economy shrank 0.1 percent in the three months to February.
The pound fell to a 2-1/2 year low against the dollar and British government bonds rallied after the weak manufacturing data, which raised expectations for more bond buying from the Bank of England to shore up the economy.
“This is the penultimate nail in the coffin in terms of triple dip - it’s pretty much game over now,” said Alan Clarke, economist at Scotiabank.
“Unless we have a stellar performance from the services sector, we’re almost certainly in a triple dip.”
Manufacturing output dropped 1.5 percent on the month in January, wiping out December’s gain, the Office for National Statistics said, compared to forecasts it would be flat. The statistics office noted there were few reports of any disruption from snowy weather at the end of January.
The wider reading of industrial output, which includes energy production and mining, fell 1.2 percent, more than erasing December’s rise. The poor reading was partly due to a shutdown of a North Sea oil field, called Schiehallion, which typically accounts for 3-6 percent of Britain’s oil production.
British exporters have been trying to reduce their exposure to sluggish demand in Europe and sell more to emerging markets, but data suggests the rebalancing will take time.
Weak industrial production was the main drag on Britain’s economy in the final three months of 2012, shaving 0.3 percentage point off quarterly growth and contributing to that quarter’s fall in GDP.
A purchasing managers’ survey on the much bigger services sector last week was more encouraging, showing the sector, which accounts for around three quarters of British GDP, grew in February at its fastest pace in five months.
However, British data has been volatile and manufacturing, which accounts for 10 percent of GDP, is showing persistent signs of weakness. A survey of purchasing managers revealed an unexpected contraction in the manufacturing sector in February.
“The (economic) numbers have been relatively poor and it is looking an increasingly close-run call as to whether the economy contracts in the first quarter,” NIESR economist Simon Kirby said.
Additional reporting by Li-mei Hoang; Editing by Susan Fenton