May 1, 2012 / 8:33 AM / 7 years ago

UK risks longer slump as euro woes hit factories

LONDON (Reuters) - The manufacturing sector barely grew in April as an economic slowdown in the euro zone curbed export demand, raising the chances the Bank of England (BoE) will vote for another cash boost to prevent a longer recession.

The weakness in manufacturing also cranks up the heat on the governing Conservative-Liberal Democrat coalition, which is grappling a shrinking economy and a series of political blunders as parties face a test of popularity in local elections on Thursday.

The economy has not fully recovered from a steep decline in 2008-2009, slipping back into recession at the beginning of 2012, but central bankers have so far hinted they are reluctant to extend their “quantitative easing” asset purchases later this month following a run of stronger business surveys and sticky inflation.

The composite Markit/CIPS Manufacturing Purchasing Managers’ Index (PMI) fell to 50.5 in April from a downwardly revised 51.9 in March, keeping just above the 50 level which separates growth from contraction, a survey showed on Tuesday.

The outcome fell short of forecasts for a dip to 51.5.

Sterling fell against the dollar and euro after the release, which also contributed to a rally in British government bonds.

“It’s all apiece with recent data which tells us that the economy is weak and likely to remain so for some time,” said Peter Dixon, economist at Commerzbank.

Eyes are now on the service-sector PMI, due on Thursday, which is also expected to show slower growth.

“If the April services PMI also falls back markedly and the (euro zone) crisis intensifies in coming days, then the (BoE’s) Monetary Policy Committee (MPC) could well decide to add more stimulus at the May meeting next week,” said Citi economist Michael Saunders.

For the time being, most economists do not expect more quantitative easing.

The manufacturing PMI, the lowest since December, lent some credence to disputed official data that showed an economic contraction in Britain in early 2012.

The BoE and many economists have argued that the official figures understate the economy’s true strength, pointing to more upbeat evidence from surveys, including earlier PMIs.

Elsewhere the mood is more sombre. The chief executive of British bank Lloyds warned on Tuesday of a “long and difficult” path to economic recovery in Britain.

“We expect it to recover to growth in 2013 and expect unemployment to peak at close to 9 percent by early next year,” Antonio Horta-Osorio said.

DIFFICULT SITUATION

The weakness in UK manufacturing was replicated in Britain’s neighbour Ireland, where growth in the sector almost ground to a halt in March as output fell.

Economic fortunes were better further afield, with China’s official PMI rising to a 13-month high, signalling the economy may be recovering from a first-quarter trough.

Britain’s economy is mired in what some economists already describe as a depression and the government has come under pressure to ease its austerity drive, which the opposition Labour Party says is choking off recovery.

A spokesman for the prime minister said the government was focused on boosting growth, as well as reducing the budget deficit, adding: “It’s a very difficult situation”.

Although British manufacturing output, a measure that feeds into the main PMI, expanded for the fifth consecutive month in April, it was at the weakest pace since December - partly due to the sharpest fall in new export orders since May 2009, said Markit which compiles the PMI survey.

Overall new orders dropped for the first time since November, with manufacturers blaming sluggish overseas demand and strong competition.

And a strengthening in sterling to its highest in more than two and a half years on a trade-weighted basis poses another threat to exporters, by either sapping foreign demand for British wares or squeezing firms’ profits via lower prices.

Production of consumer goods fell, while output of intermediate goods, such as car engines, and investment goods, such as factory equipment, both rose.

“It seems that weaknesses in our major trading partner, the euro zone, are starting to hit home, especially for consumer goods producers,” said Rob Dobson, senior economist at Markit.

Domestic orders for consumer wares also fell, in a sign that Britons are still keeping a tight rein on their budgets as below-inflation wage growth and government austerity hurt spending power, while worries about jobs weigh on confidence.

However, the BoE predicts that falling inflation will encourage Britons to loosen their purse strings later this year.

In April, though, factory-gate price inflation reached a seven-month high, despite manufacturers’ costs rising at a much slower pace than in March.

Editing by David Holmes

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