UK manufacturing falls sharply
By Claire Jones, Economics Reporter
Fallout from the loss of the UK’s prized triple A credit rating may have been less dramatic than George Osborne feared. But data released this week serve as a grim reminder to the chancellor of the scale of the task confronting him as he prepares for this month’s budget.
Financial markets shrugged off the news that Moody’s, the credit rating agency, had downgraded the UK by one notch to Aa1 last week.
But the pound on Friday plunged to a two-and-a-half-year low against the dollar after weak figures on manufacturing activity rekindled fears that meaningful growth would continue to elude the UK.
Manufacturing activity in the UK, which makes up more than 10 per cent of the economy, shrank in February as tough market conditions at home and abroad damped demand, according to an influential poll of purchasing managers.
The purchasing managers’ index for manufacturing, compiled by Markit and CIPS, fell to 47.9, its lowest level since October and far worse than analysts had expected. A figure below 50 signals a contraction in activity.
The weak data are a further blow to the hopes of Mr Osborne and the Bank of England that the UK will be able to export its way out of trouble. It also stoked concerns that the UK economy would contract for the second successive quarter in the three months to March, resulting in the much-feared triple-dip recession.
“The return to contraction is a big surprise and represents a major setback to hopes that the UK economy can return to growth in the first quarter and avoid a triple-dip recession,” said Chris Williamson, an economist at Markit.
Economic output has now barely budged since 2010, with the lack of a meaningful recovery one of the key factors behind Moody’s downgrade.
Friday’s data increase pressure on the Bank of England’s monetary policy committee to authorise additional money printing when it meets on Thursday. It emerged last week that three of nine MPC members, including governor Sir Mervyn King, voted for more quantitative easing in February.
“We still think it likely the MPC will keep policy on hold, although Friday’s weak data provide the case for further QE with a certain degree of extra momentum,” said Philip Shaw, economist at Investec.
Much will hinge on whether Tuesday’s purchasing managers’ index for the services sector, which makes up more than three quarters of the economy, is as bad as the manufacturing PMI.
The BoE may also be cautious about reading too much into a single piece of data. Markit said the January weather had a knock-on effect on the February figures, as heavy snow disrupted deliveries.
In contrast to the poor manufacturing data, official figures for the construction industry were unexpectedly positive. The Office for National Statistics on Friday reported that construction order volumes rose 3.4 per cent in the final three months of 2012, leaving orders up 11.2 per cent year-on-year. Construction makes up between 6 and 7 per cent of gross domestic product.