The U.K. manufacturing sector contracted at the fastest rate since March 2009 due to substantial declines in output and new orders, suggesting a sharp downturn in the economy at the start of the third quarter.
The seasonally adjusted purchasing manager's index fell to 45.4 in July from a revised reading of 48.4 in June, data from a survey by the Chartered Institute of Purchasing & Supply and Markit Economics showed Wednesday.
Economists were expecting the index to fall to 48.4 from the 48.6 estimated initially for June. A reading below 50 suggests contraction in the sector. Operating conditions deteriorated in each of the past three months.
Output and new orders both contracted sharply in July, as companies faced weaker domestic and export demand. The decline in production was the steepest in 40 months. Weak demand from Eurozone remained the principal drag on new foreign orders.
The survey also showed that input prices declined for the second month, while selling prices continued to rise. The rate of decline in input prices was only marginally slower than June's three-year peak. Lower purchasing costs were linked to reduced chemical and commodity prices. Meanwhile, manufacturers continue to pass on the higher raw material costs to customers.
Manufacturing employment improved sightly as companies raised staffing levels to complete outstanding contracts and as part of planned company expansions.
Backlogs of work dipped at the sharpest rate since March 2009 and outstanding business fell throughout the past one-and-a-half years.
"Manufacturers are doing everything they can to arrest the decline, working through backlogs, cutting back on purchasing, and passing on costs, but there is little room to manoeuvre," David Noble, chief executive officer at the Chartered Institute of Purchasing & Supply said.
A similarly severe slowdown in July's services survey would increase the chances that the Bank of England does more to stimulate the economy - perhaps even before the current batch of asset purchases is completed in November, said Samuel Tombs at Capital Economics.
Rob Dobson at Markit said the announcement of additional quantitative easing and launch of the Funding for Lending scheme are too recent to have had an effect.
The Bank of England introduced the Funding for Lending Scheme in early July to boost lending, after increasing quantitative easing by GBP 50 billion. "We wait to see whether these will provide the desired and hoped for support to industry later in the year," Dobson said.
by RTT Staff Writer
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