UK manufacturing growth slows

 
City A.M. Reporter
GROWTH in Britain's manufacturing sector eased slightly in July, with euro zone wobbles weighing on exports, but the figure still beat forecasts and remained indicative of buoyant growth in the sector.

There was also a sharp slowing in both input and output price inflation, something that should help reassure Bank of England policymakers that inflation is on its way down.

The Markit/Chartered Institute of Purchasing and Supply (CIPS) manufacturing PMI fell to 57.3 in July from 57.6 in June, above forecasts for a reading of 57.0 and holding close to May's 15-year high of 58.1.

Financial markets showed barely any response to the data, which did little to alter the view that activity will weaken as the year progresses and government spending cuts kick in, and that the BoE will therefore have to leave policy loose.

"It's still pretty robust really. It's fallen for a couple of months but is well above its long-term average," said George Buckley, strategist at Deutsche Bank, noting that the fall in export orders could be due to firms' failing to reduce prices to boost market share.

"It probably will tail off but should remain strong for the next few months."

Britain has introduced a raft of austerity measures to tackle a bulging budget deficit, which it aims to eliminate by 2015, raising fears that the economy's recovery could be put at risk.

Britain's economy grew at its fastest pace in four years between April and June, but Bank Governor Mervyn King warned last week that the pace of growth may not be sustained and that now was not the time to start pressing on the monetary brakes

MIXED SIGNALS

Still, the manufacturing sector has expanded for a whole year, with the headline activity rate holding above the 50.0 mark that separates contraction from growth since last July.

"This all suggests that the manufacturing sector will remain a strong contributor to GDP in the third quarter, raising hopes that growth of the economy may not slow too significantly," said Markit Senior Economist Rob Dobson.

"There are some concerns that growth may slow more sharply in coming months, however, especially in relation to exports. Overseas sales growth collapsed from a survey record rate of increase in April to near-stagnation in July," he added.

Export orders slowed to their lowest reading since August last year, possibly due to sterling's recent strength against the euro. Markets are wary about the fiscal positions of some countries in the euro zone, Britain's biggest trading partner.

The export order sub-index fell to 50.8 in July, from 51.5 in June -- the third consecutive month this component has fallen.

The pace of growth of goods purchased by manufacturers eased to its lowest reading in eight months, and stocks of purchases also slowed.

Markit/CIPS said some respondents to its survey reported efforts to reduce backlogs of work and cut back inventories, partly to improve cash flow positions. Such initiatives helped support employment, Markit/CIPS said.