Manufacturing growth stalls

City A.M. Reporter
GROWTH in the country's manufacturing sector slowed more than expected last month, led by the weakest expansion in new orders for more than a year, a purchasing managers' survey showed.

The Markit/Chartered Institute of Purchasing and Supply Manufacturing PMI fell to 54.3 in August – from a downwardly revised 56.9 in July. That was the lowest level since November last year although it was still above the 50 mark which separates growth from contraction in activity.

The figures support the view that Britain's economy is losing traction after surprisingly strong growth in the second quarter. They are also likely to bolster expectations that UK interest rates will remain at a record low 0.5 per cent for many months to come.

"The expected slowdown in the UK manufacturing recovery from its highs earlier in 2010 is underway," said Rob Dobson, senior economist at Markit Economics.

"Taken alongside the euro zone figures published today, it looks as if a broad industrial slowdown is occurring across much of the EU."

A euro zone purchasing managers' index fell to a six-month low in August, data showed on Wednesday.

Britain's manufacturing sector has been expanding for just over a year but the pace has cooled steadily over the past four months.

The PMI's new orders index, a leading indicator of activity growth, fell particularly sharply to 52.0 in August from 58.5 in July. That was its lowest level since June 2009 and its biggest one-month fall in more than six years. There was a slight pick-up in export orders growth, indicating the bulk of the slowdown came from weaker domestic demand.

"Some firms noted that subdued client confidence and uncertainty regarding public sector cuts had led to slower sales growth," the survey noted.

Britain's economy expanded by a surprisingly robust 1.2 percent in the second quarter but few believe this pace can be maintained in the second half of the year in the face of huge public spending cuts and renewed jitters in global financial markets.

The orders-to-inventory ratio, another forward-looking indicator, fell to its lowest in 17 months, suggesting activity is likely to slow further in the coming months.

There were mixed signals regarding the inflation outlook. Input price inflation eased to its weakest since January but output price inflation gathered pace to only a whisker below peaks scaled in mid-2008.

Meanwhile manufacturing activity in the euro zone expanded in August at its slowest pace since February as the speed of recovery among member countries diverged further, a survey showed.

The Markit Eurozone Manufacturing Purchasing Managers' Index for August dropped to 55.1 from 56.7 in July but was nudged up from an earlier flash estimate of 55.0 and marked its 11th month above the 50.0 mark that divides growth from contraction.

The output index slid to 57.1 last month from 58.7 in July and was revised down from a flash reading of 57.2.

"The euro zone manufacturing PMI suggests that the expected cooling of the sector from the buoyant growth rates seen earlier in the year is underway," said Rob Dobson at data provider Markit.

"Expansion of output and new orders both slowed noticeably in August although, on current form, manufacturing should provide a solid contribution to third-quarter GDP."

The euro zone economy escaped from its worst post-war recession in the third quarter of last year and preliminary data showed the economy grew a faster-than-expected 1.0 percent between April and June.

But growth is seen slowing to 0.4 per cent in the current quarter and then to 0.3 percent in the following three quarters.

Services PMIs due on Friday are expected to confirm that the bloc's dominant service sector also saw a slower expansion in August.

Purchasing managers' surveys released earlier showed manufacturing growth in Germany, Europe's biggest economy, slowed in August whereas business in France accelerated. Italy and Spain saw their manufacturing indexes slip backwards, widening the gap among the euro zone's big four economies.

"Drilling down into the national data highlights just how uneven the recovery remains. August saw France, Germany and Austria stay well ahead of a subdued chasing pack including Spain and Italy, while Greece remained firmly in the grips of a deep downturn," Dobson said.

As factories struggle to maintain growth they have found it harder to raise prices.

The euro zone's input and output price indexes both fell in August from July, with the latter falling to 52.2 from 52.7 the month before – its lowest reading since March.

Data released on Tuesday showed euro zone inflation slowed as expected in August to 1.6 per cent year-on-year but unemployment held steady at a near 12-year high of 10 per cent. The PMI employment index held steady just above the break even mark.