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Manufacturing slumps to three-year low ahead of interest rate decision

Published 01/08/2016

The result will heap further pressure on the Bank of England to hand the UK economy a fresh dose of monetary stimulus
The result will heap further pressure on the Bank of England to hand the UK economy a fresh dose of monetary stimulus

Britain's manufacturing industry has slumped to its lowest level in more than three years ahead of a key interest rate decision this week as the Brexit vote took its toll on the sector.

The closely-watched Markit/CIPS UK Manufacturing purchasing managers' index fell to levels last seen in February 2013 as it hit 48.2 in July, down from 52.4 in June and below economists' expectations of 49.1.

A reading above 50 indicates growth.

The result will heap further pressure on the Bank of England to hand the UK economy a fresh dose of monetary stimulus when it votes on interest rates this Thursday.

The survey showed that the manufacturing sector had slipped even further since the flash UK manufacturing PMI published towards the end of last month when it fell back to a 41-month low of 49.1 in July.

It also found that the rate of job losses across the sector was its second-sharpest for almost three-and-a-half years.

Rob Dobson, Senior Economist at Markit, said the downturn was industry-wide with output scaled back across firms of all sizes.

" The pace of contraction was the fastest since early-2013 amid increasingly widespread reports that business activity has been adversely affected by the EU referendum.

"The drops in output, new orders and employment were all steeper than flash estimates."

He added: "The weakening order book trend and upswing in cost inflation point to further near-term pain for manufacturers.

"On that score, the weak numbers provide powerful arguments for swift policy action to avert the downturn becoming more embedded and help to hopefully play a part in restoring confidence and driving a swift recovery."

There was some reprieve for the manufacturing industry as the slump in the value of the pound continued to help UK exports.

The survey said the level of new export orders ticked up for the second successive month in July, as companies also pushed to secure contracts.

However, it said the boost to exports was "less marked than previously estimated" due to sluggish overseas demand.

It said the fall in manufacturing production was its steepest since October 2012, while employment across the industry dropped for the seventh straight month.

The shedding of staff was linked to the slide in output, with restructuring, redundancies and outsourcing all leading to job cuts, the survey said.

It added that purchase price inflation notched up to a five-year high last month, as the fall in sterling, coupled with a rise in metal and commodity prices, drove up import costs.

David Noble, group chief executive officer at the Chartered Institute of Procurement and Supply (CIPS), said: "After seven months of modest drops, employment figures showed an entrenchment in uncertainty with a sudden deterioration - the second sharpest drop in almost three-and-a-half years, as businesses chose redundancy and restructuring to secure themselves against more possible bad news ahead.

"Without new orders coming through, this downward trajectory is likely to get worse, at least in the short term."

The update comes as UK economy showed signs of strength in the run-up to Britain's referendum on the European Union, with official figures revealing that gross domestic product (GDP) grew by 0.6% for the second quarter, up from 0.4% in the first quarter of 2016.

The Office for National Statistics said t he higher-than-expected figure was driven in part by a swing in industrial production, which rose 2.1% over the period - matching figures last seen 17 years ago - compared with a 0.2% fall in the quarter before.

The Bank's Monetary Policy Committee is widely expected to slash interest rates this week from 0.5% and embark on more quantitative easing after a string of economic surveys showed a marked slowdown in the UK economy since the Brexit vote.

Some economists have even suggested that Britain could be heading towards another recession.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said data from the PMI suggests support from the weaker pound is simply not powerful enough to offset a drop in domestic demand.

Mike Rigby, head of manufacturing at Barclays, added: "These disappointing figures would indicate that the uncertainty deterring manufacturers from making vital investment decisions prior to the EU referendum has taken a stranglehold since the vote and we can expect to see businesses continuing to protect cash and guard investment.

"Such caution is of course understandable and encouragingly the expected rise in exports, given the weaker state of sterling, is materialising but with growth in the sector being very hard-earned, manufacturers will want clarity on what post-Brexit means for their industry sooner rather than later."

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