Collapse in UK factory figures fuels call for more stimulus

Biggest fall in manufacturing sector since 2008 as eurozone crisis hits confidence and orders

Pressure on the Bank of England to pump billions more into Britain's stumbling recovery as soon as next week intensified yesterday after the biggest manufacturing collapse since the fall of Lehman Brothers in 2008.

The shock survey from Chartered Institute of Purchasing and Supply/Markit (Cips) revealed an alarming slump in the sector's fortunes during May as the impact of Europe's worsening crisis sapped confidence and orders.

Its closely watched purchasing managers index (PMI), where a score under 50 signals contraction, slumped to 45.9 from 50.2 in April. This is the biggest month-on-month fall since the immediate aftermath of the financial crisis in November 2008 and the second largest in the survey's 20-year history.

The survey immediately prompted calls for the Bank's monetary policy committee (MPC) to flood an emergency £50bn extra into the economy through quantitative easing to help drag the country out of a deepening, double-dip recession. UK output has shrunk for two successive quarters and a third is virtually certain to follow as extra holidays for the Jubilee celebrations sap growth, even before the latest signs of economic weakness.

Deutsche Bank's chief UK economist George Buckley also said the Bank may cut interest rates below their current record low 0.5 per cent.

He said: "The May PMI survey was, to put it simply, a game changer. Up until now we had been arguing the Bank of England would sanction no more QE after ending the previous programme last month. But conditions have worsened: April inflation fell more than expected, retail sales were down, CBI orders were weaker, Q1 [first quarter] GDP was revised lower and now the manufacturing PMI has collapsed.

"The MPC cannot ignore this weaker news and we have thus changed our call for £50bn more quantitative easing (QE) to be announced at the June 7 policy meeting, to be conducted over the following three months. Alongside more QE we even see a non-negligible risk of the Bank lowering rates to 0.25 per cent, which if they did would be the first cut since March 2009."

The shock plunge came against a backdrop of mounting European turmoil as shares tumbled again amid lingering worries over Spain's banks and Greece crashing out of the euro, as well as disappointing jobs figures from the US. The rush for safe havens saw Germany's two-year borrowing costs fall below zero for the first time with desperate investors willing to pay more than the face value of Bunds to preserve their capital.

The dire news came as figures showed a fresh rise in eurozone unemployment to 17.4 million, the highest since the single currency was formed in January 1999.

Cips added that UK new orders shrank at the fastest pace since March 2009 as nervy clients cancelled or postponed orders, and manufacturers delved into work backlogs to avert an even steeper decline. Firms also shed staff for the first time in five months.

Its chief executive David Noble said: "The harsh realities of the weak global economy and sluggish domestic demand are bearing down on UK manufacturing, resulting in the lowest level of new orders for over three years."

The MPC is giving more weight to business surveys than official data to judge the underlying strength of the recovery. Experts said a weak Cips survey on services – which accounts for three-quarters of the economy – could be enough to tip the Bank into more action next Thursday.

Scotia Bank's economist Alan Clarke said the manufacturing figures were "terrible", adding: "A fall of this magnitude, underpinned by a collapse in orders, is really worrying."