Manufacturing sector contracts

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The Independent Online

Britain's economic hopes were dealt another blow today as a key survey revealed that the manufacturing sector contracted for the first time in two years last month.

The Markit Purchasing Managers' Index (PMI) recorded a level of 49.1 for July - a reading above 50 indicates growth - down from a revised reading of 51.4 in June.

New orders fell for the third month in a row and at the fastest rate since May 2009 - reflecting low domestic demand, Markit said.

Economists said the results do not bode well for third-quarter growth prospects in the UK, after official figures revealed a slowdown in GDP growth from 0.5% in the first quarter to 0.2% between April and June.

The manufacturing sector has seen a downturn in its fortunes in recent months after a strong patch when it appeared to be leading the economic recovery.

Surveys from the likes of Markit and the CBI have shown an industry in gradual decline as output growth and new orders dwindle in the face of a challenging economic climate.

The survey will be a blow to Chancellor George Osborne, who has pinned his hopes on the private sector to keep the economy afloat as he rolls out swingeing public sector spending cuts.

Howard Archer, chief UK and European economist at IHS Global Insight, said Markit had published a "pretty horrible survey".

He said: "It is evident that manufacturers are now finding life really challenging as domestic demand is held back by serious headwinds notably including tightening fiscal policy and a major squeeze on consumers, while recent slower global growth is limiting export orders."

The survey did record export growth for the tenth month in a row as companies reported improved sales to Australia, China, East Asia, New Zealand and the United States.

Manufacturing employment declined slightly in July, Markit said, representing a marked turnaround from the survey's record jobs growth seen only five months earlier.

There was some cheer for the Bank of England which is battling with 4.2% inflation, more than twice its 2% target, as price pressures eased further in July.

Input cost inflation and output charges eased to the weakest rate since December 2009.

Jeremy Cook, chief economist at foreign exchange World First, said the survey was a "real shocker".

He said: "The PMI is a great indicator of the contribution that a certain sector will make to the quarterly GDP number and with this we can expect that manufacturing will be a hindrance more than anything."