October 3, 2011 / 8:35 AM / 8 years ago

Surprise pick-up in factory PMI dims October QE hopes

LONDON (Reuters) - British manufacturing activity unexpectedly grew for the first time in three months in September, a survey showed on Monday, denting expectations the Bank of England will inject more stimulus to boost the economy this week.

A worker performs visual inspections at the Rolls-Royce plant where the Phantom and Ghost models are manufactured in Goodwood, near Chichester in south England May 10, 2011. REUTERS/Toby Melville

The Markit/CIPS manufacturing PMI headline activity index rose to 51.1 last month from an upwardly revised 49.4 in August.

That was well above the 48.6 forecast in a Reuters poll, and none of the 31 economists surveyed had expected a reading above the 50 mark that separates growth from contraction.

The output component of the index bounced back with its strongest reading in five months after falling in August for the first time in more than two years, although a slide in new export orders highlighted the dangers for the sluggish recovery.

While the figures did little to ease worries about the fragile economic recovery or silence calls for the government and Bank to do more to stimulate growth, analysts said the central bank was unlikely to take any action this month.

“Today’s report suggests that while we almost certainly will see more votes for quantitative easing we are probably not going to see a majority (on Thursday),” said James Knightley, economist at ING.

“We feel it is a very close call, but narrowly favour a delay until November given the Bank will have new formalised economic forecasts.”

Economists in a Reuters poll last week saw only a 40 percent chance the central bank would decide to relaunch its quantitative easing programme at its policy meeting concluding on Thursday, but saw a 75 percent probability in November.

The Markit/CIPS services PMI index on Wednesday will give a further steer on how the economy fared last month. Activity in Britain’s dominant services sector slowed at the fastest pace in a more than a decade last month.


Despite a sharp rise in the headline manufacturing activity index, growth was still below the peaks seen at the start of the year and was largely driven by the fastest depletion of backlogs for two years, the survey said.

“If the index is to have any hope of staying at current levels, then it is going to need to see a sharp increase in incoming new business over the coming months,” said Alan Clarke, economist at Scotia Capital.

“Against a backdrop of doubts about the durability of the global recovery or financial market jitters, I very much doubt that will happen, so this increase is likely to prove temporary.”

The seasonally adjusted headline index had contracted in July and August, undermining the coalition’s hopes that manufacturing will help rebalance the economy away from its pre-crisis dependence on domestic consumption.

There was some better news in September’s survey, however. Total new orders grew for the first time since June, which firms attributed to a modest pick-up in domestic demand.

However, levels of new export orders fell at their fastest pace since May 2009, dropping to 45.0 from 46.9, due to lower demand from the United States, Europe, Asia and the Middle East.

Input prices rose at their weakest rate since January 2010 and were well down from the peaks seen at the start of the year. Output prices rose at their slowest pace since March 2010.

The backlogs of work index fell to its lowest level since September 2009, suggesting some of last month’s growth came from firms fulfilling old orders.

The employment index stayed in negative territory for a third consecutive month.

Manufacturing was one of the bright spots as Britain emerged from a deep recession in late 2009, helped by a weaker pound and

strong export demand. However, economic worries in key export markets and weaker demand at home have taken their toll.

“These data suggest that the positive contribution of manufacturing to the broader economic recovery is likely to remain modest, at best, through the remainder of the year,” said Markit economist Rob Dobson.

Last week, Europe’s biggest defence contractor BAE Systems said it would cut nearly 3,000 jobs in Britain.

Reporting by Peter Griffiths, additional reporting by London bureau; Editing by Catherine Evans

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