LONDON (Reuters) - British manufacturing activity shrank at its fastest pace in three years in May as a broad-based global economic slowdown hit demand for British goods,
according to a survey on Friday.
The latest Markit/CIPS Manufacturing Purchasing Managers' Index suggests the sector continued to drag on the economy which is mired in its second recession in two years, and may add to expectations the Bank of England will need to act to ward off the threat of a protracted euro zone-led downturn.
The figures are also likely to add to growing calls for Britain's Conservative-led coalition government to find new ways to boost growth as it presses ahead with austerity plans.
The headline PMI activity plunged to 45.9 in May from a downwardly revised 50.2 in April, its lowest reading since May 2009 and the second-steepest fall in the survey's 20-year history.
Analysts had expected a more modest dip below the 50-point mark that separates contraction from expansion, to 49.8.
Markit said the sharp decline in activity reflected the first contraction in manufacturing output in six months and the steepest decline in new orders since March 2009.
The drop is not simply linked to the ongoing crisis of the euro zone, but to increasing weakness of the UK domestic market," said Markit economist Rob Dobson.
Manufacturers are also struggling to replace orders from Europe with demand from elsewhere, with reports of slower new work inflows from the United States and Asia."
In a further sign of the darkening economic outlook, earlier on Friday the British Chambers of Commerce cut its 2012 GDP growth forecast to 0.1 percent from 0.6 percent.
Over a third of companies surveyed by Markit reported lower new orders in May, with that index falling by seven points to 42.0 - its lowest since Britain was in recession in the immed iate aftermath of the 2008 financial crisis.
The decline reflected a sharp weakening in domestic orders, though export orders were also subdued, falling for a second month running in May.
Official data last month showed Britain is deeper in recession than previously thought, and Markit's Dobson said the manufacturing survey indicated manufacturing could fall by 1 percent between April and June, raising the risk of Britain's recession continuing for a third quarter.
Despite a weaker growth outlook in the near term, the BoE opted to halt its 325 billion pound quantitative easing program in May after its latest forecasts showed inflation would take longer to fall back to its 2 percent target.
But an escalation of the euro zone debt crisis in recent weeks, with instability in Spain's banking system and a Greek election on June 17 raising the risk of a euro zone break-up, may have caused some policymakers to rethink that stance.
BoE deputy governor Charles Bean said in an interview on Thursday that the Bank had scope to restart its asset purchase program if things took a turn for the worse in Europe.
And analysts in a Reuters poll this week reckoned there was a 25 percent chance the BoE would inject more stimulus at its June 6-7 policy meeting, though only 2 out of
50 economists actually expected it to relaunch QE then.
Friday's survey, which also showed firms laying off staff for the first time in 6 months, and a marked slowdown in firms' raw materials costs and factory gate prices, could also help to tip the balance in favor of more QE.
With price pressures easing further in May, there may be a window of opportunity if the BoE wants to give industry a monetary shot in the arm," Markit's Dobson said.
Editing by Toby Chopra