Pressure grows for 'plan B' as manufacturing falters

BRITAIN'S manufacturing sector has suffered its first fall in output since the recession, piling fresh pressure on the government to boost growth.

The closely-monitored Markit/Cips purchasing managers' index for the sector, published yesterday, recorded an activity level of 49.1 for July, from a revised 51.4 in June.

It is the first time the index has been below the 50 mark that separates contraction from expansion since July 2009, and the weakest reading since June of that year. Analysts had been forecasting a reading closer to 51.

Markit said new orders had fallen for the third month in a row and at the fastest pace since May 2009 - reflecting low domestic demand.

Though it accounts for less than 15 per cent of the economy, manufacturing has been something of a star performer of late, helped by a weak pound and strong growth in many key export markets. However, cracks now appear to be forming.

The coalition government, meanwhile, has come under fire for its insistence on sticking to deep public spending cuts at a time when household budgets are being squeezed by stubbornly high inflation and weak wage growth.

Yesterday's data will add to the pressure on Chancellor George Osborne to come up with a plan to boost private- sector growth to compensate for the public cuts.

Victoria Cadman, an economist at Investec, said: "(Osborne] would have been desperate for some better data in Q3 to put to bed the calls for a 'plan B' that he is getting.

"This makes it really difficult for Osborne. If we get a couple of more months of disappointing data in manufacturing, he will have to seriously consider if there is a plan B he can deploy."

The survey results do not bode well for third-quarter growth prospects, after official figures last month revealed a slowdown in GDP expansion from 0.5 per cent in the first quarter to 0.2 per cent between April and June.

The CBI yesterday cut its UK growth forecast for this year to 1.3 per cent from 1.7 per cent.

Howard Archer, chief UK economist at IHS Global Insight, the forecasting group, said: "It is notable that the further slowdown in UK manufacturing activity in July was replicated across Europe and also in several other countries. This indicates that the global manufacturing rebound from the sharp drop in output suffered during the 2008-9 recession is now stuttering appreciably.

"This may well be influenced by inventory rebuilding having now largely run its course, as well as slowing demand."

Archer said the report made it "even more of a nailed-on certainty" that the Bank of England would keep interest rates unchanged at this week's meeting of the monetary policy committee. Analysts, however, expressed doubt at any early move to revive quantitative easing (QE) - or money printing - given the high levels of consumer price inflation.

Societe Generale economist Brian Hilliard said: "The Bank of England may be concerned enough to discuss another round of QE, but I don't think they're convinced it would work."SPARE PAGE