Manufacturing low adds to fears about recovery

Britain's manufacturers have moved "from rapid expansion to near stagnation", according to the latest survey of business confidence from the Chartered Institute for Purchasing and Supply (Cips).

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Analysts say the sector is now "falling like a stone", and the pound fell on the news, as traders put back their expectations for the next hike in interest rates to as late as November. It also suggests that the much vaunted "rebalancing" of the economy towards manufacturing may take longer than hoped.

With the service sector and construction already showing little signs of robust growth, the news fuels fears that the UK could see scant growth over the next few months, though an outright "double dip" is still unlikely.

Publishing their latest index, which showed the lowest reading since the depths of the depression in September 2009, the Cips said "weaker domestic market conditions and slower export growth" were the main factors underlying the decline.

The index, in which a number above 50 points to expansion, posted 52.1 in May, from a downwardly revised 54.4 in April. Although the PMI remained above 50 for the 22nd successive month, new orders were especially weak, and their lowest since May 2009. Manufacturing production fell negligibly following a modest reduction in new orders, ending sequences of sustained expansion that began in June 2009 and July 2009 respectively.

The latest data from the Office for National Statistics on growth in the first quarter of this year, released last week, suggests that the "domestic" economy is already in recession, with overall levels of output mainly being boosted by exports. International organisations such as the OECD and the IMF have also trimmed their growth forecasts for the UK.

Ken Wattret, an economist at BNP Paribas, commented on the data: "As recently as January and February, the index was above 60, so the index is falling like a stone. This augurs poorly for the index for the service sector for May, which is out on Friday."

Malcolm Barr, of JP Morgan, added: "Although the manufacturing data alone probably does not justify a change in rate call, the growing possibility that weakening messages across global industry will not have lifted by the time of the August Monetary Policy Committee meeting, and the ongoing debacle over Greece, add to the reasons for the middle-ground triad of members of the MPC to extend the period of wait and see beyond August.

"We are hence changing the forecast to show rates rising at 25 basis points a quarter from November onward."

Consumer goods producers saw the sharpest contractions in both production and new orders during May, again reflecting the weakness of the domestic market.

Although growth was sustained at investment goods producers, the Cips report said, which reflected overseas demand, the rate of expansion slowed sharply, as it has with exports more generally. There was also evidence that the small-sized manufacturers fared worse than larger-sized companies.