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Manufacturing declines, but at slower pace

The speed at which Britain's manufacturing sector is declining slowed marginally during January, figures published yesterday revealed, but the country's industry remained mired in the recession.

The Chartered Institute of Purchasing and Supply (CIPS) said its Purchasing Managers Index (PMI), a measure of orders and output, was 35.8 last month, up from 34.9 in December, but still well short of 50, the level below which the indicator shows a decline.

While manufacturers will welcome any suggestion that the rapid decline of the sector might be bottoming out, last month's PMI is the third worst recording ever made by CIPS.

“Purchasing managers in the manufacturing sector reported an anaemic opening to 2009 with record falls in employment as factory jobs were cut at an astonishing rate of 30,000 a month,” said Roy Ayliffe, a CIPS director.

The collapse in the fortunes of British manufacturers reflects both domestic and international factors, with demand falling sharply at home and overseas, despite a fall in the value of the pound.

“While the weaker sterling exchange rate acted as a precarious crutch to help prop up new export orders in January, the benefits were far offset by the downturn in global demand,” Mr Ayliffe said. “On the home front, manufacturers continued to wrestle with floundering domestic demand as nearly three-fifths of firms reported a decline in orders.”

Howard Archer, chief UK and European economist at Global Insight, the economic analyst, said the slower rate of decline recorded by CIPS was better news, but warned that he expected manufacturing to continue to contract for some time.

“The UK manufacturing sector is being battered by depressed domestic demand, very weak activity in key export markets, very tight credit conditions and intense competition,” Mr Archer said. “While the substantially weaker pound is helping UK manufacturers, this is being more than offset by sharply deteriorating domestic demand in key export markets, notably the eurozone and the US.”

However, Philip Shaw, chief economist at Investec, said many companies would cling to any optimistic signals they could find.

“The headline index bounced back against market expectations, although it is still at a low level,” he said. “These figures suggest manufacturing may have troughed in the fourth quarter of last year and conditions may be slowing starting to improve.”

Mr Shaw, in common with other economists, said he did not believe the slight improvement in the manufacturing numbers would be reason, in isolation at least, for the Bank of England's Monetary Policy Committee not to cut interest rates again when it meets this week, as it is expected to do.

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