Britain heads for new recession

Buses pass the Bank of England in the City of London February 23, 2013.

LONDON (Reuters) - The risk that Britain is entering its third recession in four years grew on Friday with figures showing that manufacturing shrank unexpectedly last month and mortgage approvals for home buyers dropped in January

Gross domestic product fell at the end of last year, bringing Britain within sight of another recession and the latest data suggested the central bank may need to do yet more to revive the economy.

The pound sank to its lowest level against the dollar in more than 2-1/2 years, while prices of British government bonds - which the Bank of England could resume buying - rose after the releases.

The Markit/CIPS Manufacturing Purchasing Managers' Index (PMI) fell to 47.9 from a downwardly revised 50.5 in January, confounding forecasts for a rise to 51.0. It was the first reading below the 50 line that separates growth from contraction since November.

A separate release showed that mortgage approvals fell unexpectedly despite the authorities' efforts to boost lending.

"It's a bit of a double whammy of disappointing news," said Alan Clarke, economist at Scotiabank. "Not a good start (to the year) and really shouldn't change anyone's view that there's precious little growth momentum in the UK and particularly not in manufacturing."

The numbers are the latest in a string of bad news for the Conservative-led coalition government and its finance minister George Osborne. Moody's downgraded Britain's triple-A rating last week, prompted by weak economic growth prospects.

In the last quarter of 2012, a plunge in factory output - which accounts for around a 10th of the economy - shaved 0.1 percentage point off economic growth, according to official data released earlier this week. Markit said factory output fell last month at the fastest pace since October.

"The return to contraction of the manufacturing sector is a big surprise and represents a major setback to hopes that the UK economy can ... avoid a triple-dip recession," said Chris Williamson, the Markit economist who compiled the survey.

"A strong rebound is needed in March to prevent the sector from acting as a drag on the economy as a whole in the first quarter."

OUTLOOK DIM AS ORDERS FALL

On some measures, the chances of such a rebound look slim. The subindex for new orders fell to 46.6 in February, the lowest reading since July, as market conditions remained tough at home and abroad, especially in Europe. Backlogs of work also shrank.

However, Williamson said there were good reasons to believe manufacturing could recover in March, noting that the weaker pound might help exporters, while factories were also hit by disruption to deliveries from bad weather in late January.

"The Chinese New Year holidays are having an increasingly disruptive impact on global trade flows ... and appear to have had a stronger than usual effect in February," he added.

The housing sector also revealed signs of weakness.

Mortgage approvals fell to 54,719 in January from 55,632 in December, short of analysts' forecasts for a rise to 56,500, the central bank said.

A rise in the flow of credit in recent months, particularly in home loans, fed hopes that the BoE's flagship Funding for Lending Scheme is helping home buyers, though lending to companies remains sluggish.

Mortgage lending grew by 147 million pounds, the smallest increase since August, also less than forecast.

(Editing by Jeremy Gaunt.)