Manufacturers suffer fall in orders

Manufacturers have reported their first drop in new orders in nearly two years after a run of bank holidays and weak consumer conditions hit demand.

The Markit/CIPS Purchasing Managers' Index, where a reading of more than 50 indicates growth in overall manufacturing activity, fell to 52.1 in May, from a downwardly revised 54.4 in April.

The extra bank holiday for the royal wedding on April 29, which fell in the early part of the survey period, contributed to a drop in production and new orders for the first time since June and July 2009 respectively.

Economists have already warned the additional bank holiday was likely to hit GDP growth in the UK for the second quarter of 2011.

A drop in domestic demand dragged on order books in May, according to the survey, but export orders also dropped to an eight-month low.

The survey also highlighted the ongoing impact of the Japanese earthquake in March, which has disrupted supply chains.

The weak performance will raise concerns about the ability of the UK economy to withstand the Government's tough austerity measures.

Andrew Goodwin, senior economic adviser to the Ernst & Young Item Club, said: "The manufacturing PMI has been dropping like a stone over the past few months and, with activity now barely growing, these results will trigger genuine concern about the sustainability of the recovery."

Consumer goods producers and small-sized manufacturers turned in the weakest performances in the survey period.

But the figures brought some cheer as they showed an increase in staffing levels for the 14th consecutive month, while input and output prices moderated.

Howard Archer, chief UK and European economist at IHS Global Insight, said the weak growth meant the Bank of England was unlikely to raise interest rates from historic lows of 0.5% at its meeting next week.

He said: "Manufacturers now appear to be finding life more challenging as stock rebuilding wanes and tighter fiscal policy weighs down on domestic demand.

"There are also signs that global demand is slowing as export orders fell back markedly in May."

The slowdown in manufacturing was reflected in Europe and several other countries.

James Nixon, economist at Societe Generale, said much of the fall in European manufacturing was down to the Japanese earthquake which triggered component shortages.

He said: "This should set the stage fo quite a sharp deceleration in growth in the second quarter both in the euro area and globally.

"However by the same token, we also expected the impact from the Japanese earthquake to be fairly short-lived and expect activity to subsequently recover in the second half of the year."