Downward spiral as manufacturing sees fourth straight fall

Published on Monday 1 September 2008 22:08

IN A further blow to the economy, new figures have revealed that the manufacturing sector shrank for the fourth consecutive month in August, fuelling fears that Britain is moving closer to recession.

The purchasing manager's index (PMI) revealed a contraction in the sector, registering 45.9 last month, as manufacturers reported falling volumes of new orders and output levels.

And the figure is only slightly higher than the July level of 44.1 – the lowest reading since the series began nearly a decade ago.

A reading below 50 signals contraction in the industry.

New orders slumped across the consumer, intermediate and investment goods sectors, while manufacturing industry also saw job losses for the fifth month in a row.

Output dropped further, but the decline was noticeably slower than one month ago, as a number of firms diverted spare capacity towards completing existing contracts.

The Chartered Institute of Purchasing and Supply's (CIPS) new-orders index was 42.7 in August, up from 40.6 the previous month. And the output reading came in at 48.7 – a marked improvement from 43.2.

Jonathan Loynes, chief European economist at Capital Economics, said that, even after August's increases, the survey was still pointing to falls in manufacturing output of around 4 per cent per annum.

"With all of the other activity indices still below the 50 level, there is nothing in this survey to suggest that the manufacturing sector is not about to enter a fairly deep recession," he said.

Rob Dobson, senior economist at Markit Economics, which co-compiled the survey, said: "The downturn in manufacturing continued into August, as a lacklustre domestic market and high inflationary pressures eroded confidence at businesses and households alike. These factors weighed heavily on order books, while the ensuing global economic slowdown meant there was no support from the external sector."

Roy Ayliffe, director of professional practice at the CIPS, said: "Although the manufacturing economy improved marginally from July's nine-and-a-half year low, the sector is still declining but at a slower rate."

He added that costs had continued to surge on the back of high energy, food and fuel prices while the weak sterling also pushed up the cost of imports. The data showed factory gate prices rose at their highest since the series began, with the output price index up to 64.5 in August from 63.1 in July.

Howard Archer, chief economist at Global Insight, said rising prices of manufacturers' goods "highlight the fact that there are still serious inflation risks that make it difficult for the Bank of England to cut interest rates in the near term".