December 1, 2011 / 9:32 AM / 9 years ago

Manufacturing shrinks at fastest rate in 2 years

LONDON (Reuters) - Britain’s manufacturing sector shrank for a second successive month in November and at its fastest pace since June 2009 as output and orders fell on weak global demand, a survey showed on Thursday, fuelling fears Britain faces another recession.

Prime Minister David Cameron speaks to workers at the Toyota factory in Burnaston, November 24, 2011. REUTERS/Darren Staples

The decline in activity amid a worsening debt crisis in the euro zone forced companies to cut jobs at the fastest rate in more than two years, the purchasing managers’ survey showed.

Output also fell last month at the fastest pace in more than two years and new orders contracted for a fifth straight month, although at a slower pace than in October.

The Markit/CIPS Manufacturing Purchasing Managers’ Index (PMI) fell to 47.6 in November, its lowest level since June 2009, from an upwardly revised 47.8 in October.

The index was below the 50 mark that indicates growth in activity for a second month running.

Analysts predicted that the manufacturing sector would continue to contract in the coming months.

“Consequently, we expect the Bank of England to announce additional quantitative easing measures in the new year even if there are positive developments at next week’s ECB meeting and the EU leaders summit on December 9,” said James Knightley, economist at ING Financial Markets.

There was little immediate gilt reaction to the release of the manufacturing PMI, with March gilt futures continuing to drift downwards.

“The manufacturing engine has run out of steam,” said Rob Dobson, senior economist at Markit. “Output is falling at the fastest rate since early 2009 as order inflows from domestic and overseas markets continue to deteriorate. Jobs are consequently being lost at the fastest rate for over two years as producers seek to scale back operating capacity in line with a darkening economic outlook.”

The Organisation for Economic Cooperation and Development warned this week that Britain is heading for a modest recession early next year while the official forecast for UK economic growth next year was slashed to 0.7 percent, from 2.5 percent.

The survey showed input prices fell in November for the first time since July 2009, offering some relief to manufacturers who raised their own prices by the smallest margin since October 2009.

Dobson said lower inflation may give scope for the Bank of England, which has been purchasing government bonds and other assets to try and stimulate the economy, to provide further stimulus.

Manufacturers were running down inventories to cut costs which could mean that inventories, which helped prop up economic growth in the third quarter, would drag on growth in the fourth quarter, he said.

“The lack of new work is forcing manufactures to rely on previously placed orders to avoid sharper cutbacks in output and employment. This cannot go on indefinitely, and job losses will inevitably mount if order books continue to weaken,” Dobson said.

Job losses in November were much more marked at large companies whereas small and medium-sized firms were adding staff, according to anecdotal evidence cited by Markit.

Manufacturing is being hit by weak demand in the euro zone in particular as the currency bloc, Britain’s biggest trading partner, has embarked on widespread austerity measures to try and contain its debt crisis.

However, the PMI survey showed orders from the United States and Asia also declined last month, reflecting weak global demand and rising uncertainty in financial markets.

The Office for Budget Responsibility, which makes the UK’s official economic forecasts, expects the economy to shrink by 0.1 percent this quarter and grow by just 0.1 percent in the next two quarters, just missing a recession defined as two quarters of negative growth but still very weak.

Chancellor George Osborne, in his autumn budget statement to parliament on Tuesday, announced help for small businesses to try and stimulate the economy, including underwriting up to 40 billion pounds in low-interest loans for small and medium-sized companies. (Editing by Toby Chopra)

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