September 1, 2011 / 8:36 AM / 8 years ago

Factory activity at 26-month low as exports dive

LONDON (Reuters) - Manufacturing activity shrank at its fastest pace in over two years in August, hurt by a sharp drop in demand for exports, data showed on Thursday, in a further sign that the economic recovery is stalling.

MG6 cars sit on the production line at the MG Longbridge factory in Birmingham, central England April 13, 2011. REUTERS/Darren Staples

The Markit/CIPS manufacturing PMI headline activity index fell to 49.0 in August from an upwardly revised 49.4 in July.

That was the weakest level since June 2009 and the second straight month below the 50 line separating contraction from expansion, though it was slightly better than forecasts for a reading of 48.6.

Manufacturing output contracted for the first time since May 2009.

There was little market reaction to the data, which reinforced expectations that the Bank of England would leave interest rates on hold at their record low 0.5 percent for at least another year.

“This is very much a global story but we judge that the implications for domestic interest rates are that we are unlikely to see a hike in the Bank rate until early 2013,” said Philip Shaw, economist at Investec.

Meanwhile, signs that price pressures are continuing to ease should reassure rate-setters that inflation is heading down. The PMI survey showed input prices rose at their slowest pace in almost two years, while factory gate inflation was its lowest since last November.

“This provides support to the Bank of England’s belief that inflationary pressures are temporary and offer room for manoeuvre if any further stimulus is required,” said Markit economist Rob Dobson.

Bank dove Adam Posen this week called for central banks of all advanced economies to buy more financial assets to support growth, after the U.S. Federal Reserve hinted it may consider a further cash injection.

EXPORT GLOOM

Thursday’s gloomy figures will also add to pressure on the Conservative-led coalition government to come up with a plan to support growth at a time when deep public spending cuts are hurting domestic demand, and the global economy is faltering.

The economy grew by just 0.2 percent from April to June and most analysts reckon growth will remain muted for many more months to come.

Despite accounting for only 13 percent of total economic output, the manufacturing sector has been a major force in driving Britain out of recession from the end of 2009, boosted by stock building, a weak pound and solid export demand.

But the PMI survey showed worsening global economic conditions have hurt demand for British goods. New export orders index fell more than 7 points to 46.6, the first contraction in almost a year and the fastest decline since May 2009.

The report showed domestic demand is also flagging with new orders falling for the fourth consecutive month.

“The sudden and substantial drop in new export orders is particularly worrisome, with UK manufacturers hit by rising global economic uncertainty, just as austerity measures are ramping up at home,” Dobson said.

“As consumer and business confidence are slumping both at home and abroad, it is hard to see where any near-term improvement in demand will spring from.”

Consumer goods output rose at the fastest pace for five months but Markit said the sector remained weak and the rise was due to companies building up stocks. Overall stocks rose for the first time in 39 months.

But there was bad news for jobseekers. Companies cut staffing for the first time in almost one and a half years.

“All in all, then, the CIPS survey highlights the increasing risk that the industrial sector - and perhaps even the overall economy - is heading for a double-dip,” said Samuel Tombs of Capital Economics.

Editing by Hugh Lawson

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