October 1, 2010 / 8:43 AM / 9 years ago

Soft factory PMI hints at growth slowdown

LONDON (Reuters) - Activity in Britain’s manufacturing sector slowed to a 10-month low in September after export orders fell for the first time in a year, a survey showed on Friday, suggesting growth may have peaked.

Kathy Thurston handles HVAC system motor parts on an assembly line at the Honeywell International Automation and Control Solutions manufacturing plant in Golden Valley, Minnesota, January 28, 2010. REUTERS/Eric Miller

The Markit/Chartered Institute of Purchasing and Supply manufacturing PMI index fell to 53.4 in September from a downwardly revised 53.7 in August. That was the lowest since November 2009 and below forecasts for a reading of 53.8.

There was little market reaction to the figures, although analysts said they provided further evidence Britain’s recovery was losing steam after strong growth in the second quarter.

“Today’s survey adds to other evidence suggesting that the economic recovery is fading fast,” said Vicky Redwood at Capital Economics. And signs price pressures are easing and that firms still have spare production capacity should provide reassurance the BoE can leave interest rates at their record low of 0.5 percent for longer without stoking inflation.

“This makes it a stone-dead certainty that the BoE will keep interest rates down at 0.5 percent at the conclusion of its October Monetary Policy Committee next Thursday,” said Howard Archer, economist at IHS Global Insight.

“It also maintains pressure on the Bank to consider reviving quantitative easing, although we expect them to hold fire for the time being at least.”

BoE policymaker Adam Posen this week said the central bank might need to restart a programme to pump money into the economy, although most analysts reckon he will have difficulty winning over other policymakers as inflation is still high.

SUBDUED OUTLOOK

The PMI survey showed output fell back to grow at its slowest pace since last September and the employment index also fell to stand barely above the 50-level which separates expansion from contraction. “More worrying is the order book trend,” said Rob Dobson, senior economist at Markit. “This suggests that the slowdown in production has further to run.” The new orders index improved by almost two points, but the export orders index fell below 50 to show foreign demand declining for the first time since July 2009. Markit said respondents had reported a drop in demand from clients in mainland Europe, the United States and Russia.

Foreign demand for British goods has not been as strong as experts thought it would be even though sterling has lost around a quarter of its value against other currencies since 2007.

And the prospect of a pick-up in exports is looking increasingly uncertain as Britain’s key trading partners face muted growth and fiscal austerity measures.

That, together with sharp cuts in government spending, mean the UK’s surprisingly robust 1.2 percent growth between April and June could turn out to be the peak for now.

Editing by Toby Chopra

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