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Poor UK manufacturing survey adds to triple-dip recession fears Poor UK manufacturing survey adds to triple-dip recession fears
(about 11 hours later)
Britain's manufacturing sector shrank unexpectedly in February, adding to fears that the UK could slide into its third recession in four years. Fears that the UK could slide into a triple- dip recession grew on Friday after a surprise fall in factory output, which sent the pound tumbling below $1.50 for the first time in more than two years.
The survey of manufacturing from CIPS/Markit – which provides the first economic indicator of the month – is a fresh blow for the embattled chancellor, George Osborne, who will face heavy criticism if the UK economy drops into an unprecedented triple-dip recession this quarter. Snapshots of manufacturing from the eurozone painted a similarly grim picture, while unemployment in the currency bloc hit its highest rate since records began in 1995.
Factory output and new orders both fell over the month, making it likely the sector will drag on economic growth over the first three months of the year. The news sent the pound tumbling against the dollar, dropping to $1.5044, its lowest rate in more than two-and-a-half years. The news prompted economists to predict a fresh round of stimulus measures from both the European Central Bank and the Bank of England to lift Europe's economy out of the doldrums.
Economists had expected the sector to grow in February, but the purchasing mangers' index (PMI) slid to 47.9, pushing it below the 50-mark that separates expansion from contraction and dashing hopes of a rise to 51. At the same time, Markit revised January's index slightly down to 50.5. The UK's monthly health check of manufacturing – the first economic indicator of the month – is a fresh blow for George Osborne after Moody's stripped Britain of its triple-A credit rating.
New orders dropped for the second month running and at a faster pace than in January, with companies blaming tough market conditions at home and abroad. That prompted them to shed staff at the fastest rate in more than three years, with big companies making the deepest cuts. The UK economy shrank by 0.3% in the final three months of 2012, dragged down by weakness in the manufacturing sector. If output falls again in the first three months of 2013, Britain will be officially into its third recession since the financial crisis, an unprecedented triple-dip.
The UK economy shrank by 0.3% in the last three months of 2012, dragged down by falling factory output. That put it on the road to another technical recession – defined as two consecutive quarters of contraction. Economists had expected the factory sector to grow in February, but the CIPS/Markit purchasing mangers' index (PMI) slid to 47.9, pushing it below the 50-mark that separates expansion from contraction.
Chris Williamson, chief economist at Markit, said the survey results were "a big surprise and represent a major setback to hopes that the UK economy can return to growth in the first quarter and avoid a triple-dip". Some analysts now expect the Bank of England to expand its quantitative easing programme by £25bn at its meeting next week. David Tinsley at BNP Paribas said that would be the start of a series of measures to stimulate the economy, following the arrival of the new bank governor Mark Carney in July.
But he said there was still some hope the UK could avoid another downturn. "First, the bad weather at the end of January looks to have had a knock-on effect to production and orders in February via disrupted deliveries. Second, the Chinese new year holidays are having an increasingly disruptive impact on global trade flows as each year goes by and appear to have had a stronger than usual effect in February. Third, the weaker pound may help exporters in coming months," explained Williamson. The UK gloom contrasted with figures from the US showing the manufacturing sector growing last month at its fastest rate in more than 18 months.
Manufacturing output also fell across the eurozone where a PMI of 47.9 was recorded in February, a slightly smaller fall than January's 47.8. While Germany returned to growth, there was a sharp deterioration in Italy and France suffered yet another contraction. The Institute for Supply Management's index of national factory activity rose to 54.2 in February – above the 50 mark indicating expansion. The report suggested manufacturing will continue to support US growth, but consumer spending is expected to fall as households feel the pinch from higher taxes – Americans' income tumbled 3.6% in January, the largest drop since January 1993.
Meanwhile, tensions were rising in the eurozone after Italian president Giorgio Napolitano said Germany should be doing more to pull the region out of crisis.
Speaking in Berlin, Napolitano said: "I don't want to simplify the problem, but it would be reasonable to expect an expansive impulse from Germany to contribute to a real, not just proclaimed, recovery in growth and employment in Europe."
Manufacturing data published on Friday showed Germany's factories are enjoying rising output, while there has been a sharp deterioration in Italy, and France suffered yet another contraction.
Official data showed unemployment in the eurozone hit its highest rate on record in January, with stark regional differences. The European Union's statistics agency said 11.9% of the eurozone's workforce was unemployed, the highest percentage for the currency bloc since records began in 1995, with almost 19m out of work.
Joblessness was driven higher by a surprise jump in Italy's unemployment rate to 11.7% in January from 11.3% in December, as the region's third largest economy bowed under the weight of austerity imposed by outgoing prime minister Mario Monti. By contrast, Austria had a jobless rate of 5%, while Greek unemployment hit 27% (although the latest data from Athens is from November).
Inflation in the currency bloc eased to 1.8% in February, meeting the ECB's target of below but close to 2%. That could open the door to more stimulus measures from the ECB, which has been cautious about cutting rates in case it drives prices higher.
Sarah Hewin, head of European research at Standard Chartered, said: "Inflation is just not a concern, it is not a reason why policymakers would hesitate to cut interest rates."
She said the central bank could choose to cut rates as early as next week. "But," she added, "there's an element of the ECB wanting to keep its powder dry as we enter an uncertain political situation with Italy and the Cypriot debt question to be resolved."
Growth in China's vast factory sector cooled in February as domestic demand dipped, weighing on companies already hit by slack foreign sales. But analysts said the surveys out on Friday did not signal China's economy slipping into another slowdown. .