LONDON (Reuters) - Manufacturing expanded at its slowest pace in 7 months in April and a slowdown in new orders dimmed hopes that the UK economy would pick up after a weak recovery at the start of the year.
The Markit/CIPS manufacturing PMI headline index fell to 54.6, well below even the most bearish analyst’s forecast, suggesting the recent strong performance by manufacturers is starting to weaken as domestic demand wanes.
The slowdown supported views that the Bank of England will delay even further raising interest rates from the record 0.5 percent low as it waits for the economy to pick up after making a sluggish recovery from a shock decline at the end of 2010.
“It does add further grist to the mill to the argument to keep interest rates on hold,” said Philip Shaw, chief UK economist at Investec. Sterling tumbled and gilt futures hit a contract high on Tuesday after the PMI release.
Interest rate futures show a 50 percent chance of a first post-crisis rate hike in September and a full 25 basis point increase is not priced in until the end of the year.
Manufacturers blamed the fall in new orders on weakening domestic demand, although the survey also noted that the Japanese earthquake and tsunami in March caused a “sharp lengthening” in supplier delivery times. The PMI survey was conducted between April 11 and April 21.
Separate figures from the CBI business lobby group showed retail sales recorded solid annual growth in April, although the outlook is gloomy.
The CBI distributive trades survey’s April sales balance unexpectedly rose to a four-month high of +21, up from +15 in March and better than the +13 consensus forecast.
However, the expected sales balance for May sank to its lowest since June last year and retailers said they expect seasonally adjusted sales this month to be their worst since September 2009.
Retailers have complained that rising prices, higher taxes and muted wage growth are denting consumer confidence this year and are threatening profits.
Chocolate maker Thorntons warned on profit for the second time in three months on Tuesday , blaming hot weather over Easter for a fall in sales.
Most economists say the impact of last week’s royal wedding, an unusually hot April and a late Easter are likely to distort data in the second quarter and complicate predictions.
The Markit/CIPS manufacturing PMI headline index reading of 54.6 was its lowest since September and followed a downwardly revised 56.7 in March. It was well below the 56.9 consensus forecast in a Reuters poll. Figures above 50 show expansion.
Although the output prices index eased to 64.2 in April from a record 65.2 in March, the inflation rate was still the third highest since the data were first collected in 1999.
The figures underscore the central bank’s plight as it struggles to tame inflation running at double its 2 percent target, while trying to protect Britain’s fragile recovery.
The Bank will next decide on rates on Thursday, but is widely seen leaving borrowing costs unchanged.
Manufacturing has been one of the healthiest sectors of the UK economy since Britain emerged from recession late in 2009. The PMI survey’s headline activity rate has stayed above the 50.0 mark that separates contraction from growth for 21 months.
The sector, which accounts for about 13 percent of the British economy, grew 1.1 percent in the first quarter, helped by a weaker pound and strong export demand.
But Rob Dobson, senior economist at survey compilers Markit, doubted that this would last. “The manufacturing growth spurt looks to be fading rapidly,” he said. A squeeze on consumer spending was partly to blame, he added.
The new orders index eased to its lowest level in eight months in April, although new export orders picked up slightly from the previous month.
Editing by Ruth Pitchford and Stephen Nisbet