UK manufacturing shrinks at fastest pace in over 3 years in July

Britain's manufacturing sector shrank at its fastest rate in more than three years in July, the latest PMI survey showed today, dealing a blow to hopes the country may come out of recession over the summer.

The grim figures will fuel expectations that the Bank of England will add further stimulus once the current £50bn plan to buy government bonds with newly created money ends in November, and may even trigger speculation about an earlier move.

Britain slipped into its second recession in four years around the turn of the year, and the economy contracted by a further 0.7 per cent from April to June due to government spending cuts, Eurozone turmoil, bad weather and an extra public holiday.

Many economists have been betting that some of the output lost will be recovered in the third quarter, but the Markit/CIPS Manufacturing Purchasing Managers' Index's (PMI) drop to 45.4 from a downwardly revised 48.4 in June pointed to another contraction.

It was the lowest reading since May 2009, further off the 50 mark that separates contraction from growth and well below even the most pessimistic forecast of any economist surveyed previously.

"The domestic market shows no real signs of renewed life, while hopes of exports charting the course to calmer currents were hit by our main trading partner, the Eurozone, still being embroiled in its long-running political and debt crises," said Markit economist Rob Dobson.

The survey showed that export orders fell at the sharpest rate since the height of the financial crisis in February 2009, and the output index slumped to 43.3 from 51.9.

"Companies scaled back output to the greatest extent since March 2009, as underlying demand remained weak and market conditions highly competitive," Dobson said. "It looks like the sector remains a major drag on the overall economy."

The ongoing slump in manufacturing is also keeping the pressure on the government to come up with measures to support the economy after it announced a raft of steps to get credit flowing to businesses and consumers.

The PMI survey showed that companies' cost pressures continued to ease as prices for chemicals, oil, metal, paper and plastics fell, Markit said. But firms still hiked their selling prices, Markit said.

"Manufacturers continued to pass on the higher raw material prices incurred earlier in the year, while a number also moved to protect – or recover – their operating margins," the survey compiler said.

Despite the sharp fall in activity, companies hired more staff for the first time since April. "Staffing levels had risen to complete outstanding contracts and as part of planned company expansions," Markit said.