This article is from the source 'guardian' and was first published or seen on . It last changed over 40 days ago and won't be checked again for changes.

You can find the current article at its original source at https://www.theguardian.com/business/2016/aug/01/uk-manufacturing-decline-adds-pressure-on-bank-to-cut-interest-rates-pmi

The article has changed 4 times. There is an RSS feed of changes available.

Version 1 Version 2
UK manufacturing decline adds pressure on Bank to cut interest rates UK manufacturing decline adds pressure on Bank to cut interest rates
(about 7 hours later)
Britain’s manufacturing sector shrank at the fastest pace for more than three years in the wake of the vote to leave the EU, forcing factories to cut jobs as they grappled with higher costs and lower demand. Fresh signs of falling demand and job cuts in Britain’s manufacturing sector have raised pressure on the Bank of England to soothe post-referendum jitters with an interest rate cut this week.
News that the decline in manufacturing activity in July was steeper than first thought cemented a view that the Bank of England will cut interest rates this week in a bid to shore up business and consumer spending. Factory activity shrank at the fastest pace for more than three years in July as uncertainty about the political and economic outlook hit domestic orders and a weaker pound drove up the cost of imported materials for manufacturers, according to a closely watched survey.
The closely watched Markit/CIPS UK Manufacturing PMI survey, which polls more than 600 companies monthly, suggested domestic demand for manufacturers’ goods had been hit by uncertainty both before and after the UK’s referendum on EU membership on 23 June. That overshadowed a boost to export orders from a weaker pound, which makes UK goods cheaper. News that the decline in manufacturing activity last month was steeper than first thought echoed other reports of a hit to business and consumer confidence from the Brexit vote and sparked fresh calls for government action to shore up economic growth.
The headline index was the worst since early 2013 and weaker than a “flash” estimate published in July. The latest figures also cemented a view that the Bank’s monetary policy committee (MPC) will deliver the first interest rate cut since the financial crisis and reduce official borrowing costs to a new record low of 0.25% when its latest meeting concludes on Thursday.
“Action by the MPC looks ever more certain,” said Martin Beck, senior economic adviser to forecasting body the EY Item Club.
Frances O’Grady, the general secretary of the Trades Union Congress, said the gloomy manufacturing survey was another warning sign that workers risk paying the price for the economic fallout from Brexit.
“The government should not wait any longer to see which way the wind is blowing. We need an urgent package of public investment to keep the economy moving,” she said.
Related: Hopes that UK business would shake off Brexit vote now look fanciful
The Markit/CIPS UK Manufacturing PMI survey, which polls more than 600 companies monthly, suggested domestic demand for manufacturers’ goods had been hit by uncertainty both before and after the UK’s referendum on EU membership on 23 June. That overshadowed a boost to export orders from a weaker pound, which makes UK goods cheaper.
The headline index was the worst since early 2013 and weaker than a “flash” post-referendum estimate published in July.
The new reading, which takes in responses from a greater number of firms, stood at 48.2, down from the flash estimate of 49.1 and lower than 52.4 in June. A reading above 50 denotes expansion while a reading below suggests that activity contracted. Responses were collected between 12 and 26 July.The new reading, which takes in responses from a greater number of firms, stood at 48.2, down from the flash estimate of 49.1 and lower than 52.4 in June. A reading above 50 denotes expansion while a reading below suggests that activity contracted. Responses were collected between 12 and 26 July.
The drops in output, new orders and employment were all steeper than the earlier flash estimates and will add pressure on the Bank to lower borrowing costs from their current 0.5% when policymakers announce their latest decisions on Thursday. The UK reading was much weaker than Markit’s PMI index of eurozone manufacturers. That stood at 52.0 for July, marking the 37th straight month of growth as a strong performance from German manufacturers offset weakness in Italy, Spain, France and Greece.
Most City economists polled by news service Reuters expect an interest rate cut to 0.25%. A small minority expect no change for now and some expect a bigger cut that will take the base rate to zero. In the UK, manufacturers were already shedding jobs before the referendum and the PMI report showed employment fell for the seventh month running in July.
As fears grow that the economy will slow sharply over coming months, there are expectations the Bank will complement a rate cut with other measures such as more money printing, known as quantitative easing, or an expanded scheme to give firms and households better access to credit. The latest drops in output, new orders and employment were all steeper than the earlier flash estimates, noted Rob Dobson, senior economist at survey compiler Markit..
Rob Dobson, senior economist at the PMI survey compiler Markit, said the manufacturing slowdown last month came amid increasingly widespread reports that the referendum had hit business activity. “The downturn was felt across industry, with output scaled back across firms of all sizes and across the consumer, intermediate and investment goods sectors, although exporters did report a boost from the weaker pound,” he said.
“The downturn was felt across industry, with output scaled back across firms of all sizes and across the consumer, intermediate and investment goods sectors, although exporters did report a boost from the weaker pound. However, the improvement in exports was less marked than previously estimated, blamed in part on sluggish overseas demand,” he said.
He noted that the pound, which fell sharply against the euro and US dollar after the vote to leave the EU, had helped exports but made imports to the UK more expensive.He noted that the pound, which fell sharply against the euro and US dollar after the vote to leave the EU, had helped exports but made imports to the UK more expensive.
“The downside of the currency was an upsurge in input price inflation to a five-year high on the back of rising import costs,” said Dobson. As fears grow that the economy will slow sharply over coming months, there are expectations the Bank will complement the first rate cut since March 2009 with other measures. Those could include injecting more electronic cash into the economy using quantitative easing, or an expanded scheme to give firms and households better access to credit.
The survey signalled that manufacturing employment had fallen for the seventh straight month in July. “Companies linked lower staffing levels to the contractions in output and new orders. There was also mention of natural wastage, restructuring, redundancies and outsourcing leading to job cuts,” the PMI report said. The Bank will have more to mull over when Markit releases a poll of the construction sector on Tuesday and of the much bigger services sector on Wednesday.
The manufacturing survey will be followed by similar polls of the construction sector on Tuesday and of the much bigger services sector on Wednesday.
The flash post-referendum PMI report in July already suggested activity fell at the sharpest pace on record in the services sector, which makes up the lion’s share of the UK economy and covers a wide range of businesses from hotels to insurance.The flash post-referendum PMI report in July already suggested activity fell at the sharpest pace on record in the services sector, which makes up the lion’s share of the UK economy and covers a wide range of businesses from hotels to insurance.
Elizabeth Martins, an economist at HSBC, noted the latest data added to news of a sharp drop in consumer confidence last week and reinforced expectations of a rate cut on Thursday. That has prompted some economists to predict the economy will tip into recession. But other experts caution against reading too much into surveys taken against a backdrop of political turmoil in the aftermath of the Brexit vote.
“We had already thought that the flash PMIs, collectively, would seal the deal for MPC action this week. This downward revision – and that of the GfK consumer confidence index for July – is unlikely to change any minds. But it does paint an even bleaker picture of the UK economy,” she said. “It’s still early days in terms of hard data,” said Ben Brettell, senior economist at the financial firm Hargreaves Lansdown.
“Surveys are driven by sentiment, and can therefore overreact. The dramatic fall in confidence may not ultimately be borne out by activity, and there is a case for a wait-and-see approach to monetary policy.”