September 3, 2012 / 8:42 AM / 8 years ago

UK factory slide brakes, boosting recovery prospects

LONDON (Reuters) - The downturn in Britain’s manufacturing sector eased in August after domestic clients placed more orders, an unexpectedly strong survey showed on Monday, increasing the chances that the country is finally moving out of recession.

Staff work on the Jaguar XJ production line at their Castle Bromwich Assembly Plant in Birmingham November 29, 2011. REUTERS/Eddie Keogh

The jump in the Purchasing Managers’ Index (PMI) bolsters expectations that the Bank of England will not raise the amount of stimulus it provides for the economy on Thursday, and that it will stick to its plan to buy 50 billion pounds ($79.4 billion)of gilts by November.

However, pressure still remains on the government to take bolder steps to boost an economy that has not fully recovered the output lost in the wake of the 2008-2009 financial crisis, and has been stuck again in recession since late 2011.

The Markit/CIPS manufacturing PMI jumped to a four-month high of 49.5 in August from a downwardly revised 45.2 in July, its lowest level since May 2009.

The August figure continues to show ongoing contraction in the manufacturing sector but easily beats even the most optimistic economist’s forecast in a Reuters poll.

“It is not a great number, but it is clearly not the bloodbath that the previous month suggested,” said Alan Clarke from Scotiabank. “It’s less negative, not more positive. It reassures us that we are stagnating and not slumping.”

Sterling rose to a near two-week high against the dollar and gilt futures fell after the data.

BUSINESS BANK

A stagnation in new orders was a marked improvement from the slump seen in the prior month, with the orders index jumping to 49.9 from the 41.8 in July — the biggest one-month gain in the survey’s history.

“The marked easing in the rate of contraction at UK manufacturers is heartening,” said Rob Dobson, economist at survey compiler Markit.

However, the sector remains fragile and faces big headwinds. “Overall demand remains too lacklustre to provide an imminent and sustained recovery, with investment spending still weak and domestic austerity ongoing,” Dobson said.

Most economists predict now that gross domestic product will be lower this year than in 2011, and many see only a sluggish recovery next year.

Under pressure even within his own Conservative party, Chancellor George Osborne is trying to revive the economy without spending taxpayers’ money as he struggles to meet his main goal of reducing of Britain’s huge budget deficit.

Osborne proposed a “small business bank” on Sunday to bring together existing schemes to boost lending to small businesses, and potentially more.

EXPORTS WEAK

While most economists agree that the lack of credit is hampering smaller firms, the main drag on the economy remains the euro zone debt crisis, hurting exports and business morale.

The euro zone manufacturing sector contracted faster than previously thought last month, despite factories cutting prices, as core countries failed to provide any support.

British manufacturers reported a modest increase in new work from domestic clients, Markit said. “The rate of decline in new export orders also eased sharply, despite weak demand from mainland Europe,” the survey compiler added.

The decline in output was centred on the investment goods sector, while consumer goods producers ramped up production.

Highlighting the uphill struggle ahead, a survey by business lobby EEF showed earlier on Monday that Britain’s manufacturers faced the toughest trading conditions since the end of the financial crisis in the past three months because the euro zone debt crisis sapped export demand as well as morale at home.

“The weaker global outlook precipitated by the ongoing economic challenges in Europe has clearly hit home,” EEF chief economist Lee Hopley said in a statement.

But while weak growth has derailed the government’s efforts to balance the budget within five years, the economy has continued to create jobs and unemployment has fallen. The surveys showed that manufacturers on balance kept adding staff despite pressures on profits.

($1 = 0.6296 British pounds)

Additional reporting by David Milliken and Peter Griffiths; Editing by Toby Chopra

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