Manufacturing shrinks for 6th month

LONDON (Reuters) - Factory output contracted for a sixth consecutive month in October as falling demand both at home and abroad tipped the sector into recession, a survey showed on Monday.

A worker is shown in a London furniture factory in this file photo taken July 2, 2008. REUTERS/Andrew Winning

The pace of decline last month was slower than the record contraction the previous month but analysts stuck with their bets that the Bank of England would cut interest rates by at least half a percentage point this week.

The Chartered Institute of Purchasing and Supply/Markit said its purchasing managers’ index ticked up to 41.5 in October from an upwardly revised 41.2 in September. That was above the consensus forecast of 40.0 but still the second weakest since the survey began in 1992.

Any score below 50 indicates a contraction. A recession is normally defined as two consecutive quarters of contraction.

“There can be no doubt that UK manufacturing has fallen into recession,” said Rob Dobson, senior economist at Markit Economics.

“Conditions have deteriorated rapidly over the past couple of months, as credit market turmoil and the ongoing retrenchment in global demand have proved to be a dreadful combination for UK manufacturers.”

The dramatic easing in price pressures to 55.6 from 71.8 may reassure Bank of England policymakers that they have scope to cut interest rates, even though headline inflation is still running well above target.

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“It is not as weak as had been thought but still weak enough to suggest we will get at least a 50 basis point interest rate cut from the Bank of England this week,” said George Buckley, chief UK economist at Deutsche Bank.

The central bank has never cut rates by more than half a point since it was granted operational independence more than a decade ago.


The outlook for manufacturers remains bleak, despite the weakness of the pound which has fallen more in the past year than it did following sterling’s ejection from the European Union’s Exchange Rate Mechanism in 1992.

The index for new export orders fell to 43.5, its lowest since September 2001, as beneficial currency rates were cancelled out by the global downturn.

“Anecdotal evidence indicated that the effect of deteriorating economic conditions in the European Union, the United States and east Asia on suppressing foreign demand outweighed any benefit from the weaker exchange rate,” the survey reported.

Backlogs of work fell sharply, suggesting activity was being driven by firms clearing existing orders rather than working on new ones. And the rate of contraction in employment remained close to the record pace seen in September.