July 1, 2011 / 8:35 AM / 9 years ago

Manufacturing PMI hits 21-month low

LONDON (Reuters) - Britain’s manufacturing sector expanded at its slowest pace in almost two years last month, a survey showed on Friday, as factories reduced hiring and new orders fell, reinforcing concerns about the health of the broader economic recovery.

Bottles of Johnnie Walker whisky move along on the production line at the Diageo owned Shieldhall bottling plant in Glasgow, Scotland March 24, 2011. REUTERS/David Moir

The Markit/CIPS manufacturing PMI index sank to a 21-month low of 51.3 in June from May’s downwardly revised 52.0, worse than the average forecast from economists that the index would hold steady at 52.1, the previously reported level for May.

“The manufacturing sector continued to slip closer to stagnation in June,” said Rob Dobson, senior economist at Markit. “The data will call into question the sector’s ability to pl ay a major role in delivering a robust and sustainable economic recovery.”

Manufacturing makes up about 14 percent of the British economy, and grew by a modest 0.7 percent in the first three months of the year. Britain’s government and the Bank of England are relying on strong, export-driven manufacturing growth to support the broader economy, as domestic demand and particularly consumer spending are under pressure from fiscal consolidation.

Official data showed a hefty 1.5 percent fall in production in April due to an extra public holiday for the royal wedding, and the output component of June’s PMI survey showed that growth had not bounced back to its pre-wedding levels.

“The underlying trend is still one of moderating output growth,” Markit said. “Companies attributed the increase to new product launches, catching up on backlogs of work an d to there being less bank holidays than during the previous survey period.”

Firms hired staff at the slowest pace since September last year, and new orders fell for a second straight month, with firms blaming easing in overseas demand as well as reduced government spending and customers delaying new contracts.

The only bright spot was one of the biggest declines in the rate of input cost growth since the survey started in 1992, due to the sharp fall in oil prices over the period. The PMI’s input cost component fell to 60.9, its lowest since December 2009, from 71.4. Output price inflation fell by a smaller margin, dropping to its lowest rate since December 2010.

This reduces the pressure on the Bank of England to raise interest rates from their record low 0.5 percent at a time when consumer price inflation is at a 2-1/2 year high of 4.5 percent.

“Input price and supply-chain pressures eased noticeably in June, which will ... add weight to the Bank of England’s monetary belief that the current spike in inflationary pressures will prove transitory,” Markit’s Dobson said.

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