March 1, 2012 / 9:34 AM / 8 years ago

Manufacturing growth curbs case for more stimulus

LONDON (Reuters) - Manufacturers reported further growth in February and, despite a slight slowdown, the sector’s recovery is reducing the need for more stimulus from the central bank as the economy is slowly moving out of the danger zone.

Mugs with Union flags painted on them wait to be fired as part of the Diamond Jubilee Collection at the Emma Bridgewater pottery factory in Stoke-On-Trent, central England February 24, 2012. REUTERS/Phil Noble

Some Bank of England policymakers, including Governor Mervyn King, this week played down the likelihood of another cash boost, and news that the sluggish housing market is gaining a touch of momentum bolstered views that February’s 50 billion pound cash injection may have been the last.

The Markit/CIPS Manufacturing Purchasing Managers’ Index (PMI) ticked down to 51.2 from a slightly downwardly revised 52.0 in January, which was the highest level since May, data compiler Markit said on Thursday.

The reading fell short of analysts’ forecasts for 51.8 but was still above the 50 mark which separates expansion from contraction.

Manufacturers now seem on course to help the economy grow after a 0.8 percent drop in the sector’s output led to a small overall contraction in the economy.

“It suggests to me that the round of QE expiring in May was the last one,” said Alan Clarke of Scotia Capital. “QE is an emergency measure and we are not in an emergency anymore.”

On Wednesday, Bank policymaker Martin Weale said he did not think there would be a case for more quantitative easing once current purchases are complete, and King said that markets did not have strong expectations for further stimulus.

However, policymaker David Miles, who voted for a higher dose of quantitative easing in February than the majority, said that a bigger boost now would help the economy get back on track faster and allow a quicker normalisation of ultra-low interest rates.


The PMI for the services sector, which accounts for three-quarters of the economy, will provide a better idea of Britain’s recovery when it is released on Monday.

Meanwhile, the slowdown in manufacturing highlights the bumpy road ahead, chiming with the Bank’s view that the recovery this year is likely to be slow and at risk of setbacks.

British manufacturing is still vulnerable to weakness in the euro zone, the main market for the country’s exports. The euro zone economy is in danger of tipping into recession, with the services sector shrinking last month along with manufacturing.

British manufacturing output increased, driven largely by the completion of existing contracts, and employment grew at the fastest pace since June, the PMI survey showed.

However, inflows of new orders were little changed on the month as weak demand from Britain’s public sector and the euro zone offset new business in the United States and Asia.

In addition, high oil prices drove the steepest rise in input costs since September after a hefty fall in January, with that component of the overall index posting the biggest month-on-month gain in more than 19 years.

“If this combination of rising costs and weak demand persists, sustaining output growth and job creation will become increasingly difficult,” said Markit economist Rob Dobson.

Mainly as a result of higher input costs, factory-gate prices also rose at the fastest pace since September.

Moreover, British wage deals showed a median increase of 3 percent in the period between November and January, up from 2.5 percent between October and December, Thomson Reuters’ Incomes Data Services said.

While rising wages may boost consumer spending, they may worry the central bank, which predicts inflation will fall back to its target later this year.

There was also positive news from the smaller construction sector, where the value of projects started between December and February rose by 17 percent compared to a year ago, according to construction industry analysts Glenigan.

And house prices rose more than expected in February, data from mortgage lender Nationwide showed.

Additional reporting by Peter Griffiths and Sven Egenter; editing by Ron Askew

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