Manufacturing sector shrinks again

The manufacturing sector contracted for the sixth month in a row last month as new exports fell and cost pressures rose, a closely watched survey said today.

The latest Markit/CIPS purchasing managers' index (PMI) produced a headline reading of 47.5 for October, down from 48.1 the previous month and below the 50 mark that separates expansion from contraction.

The weakness was driven by a decline in new export business, the survey said, which fell at the second-fastest pace in just over a year due to the ongoing economic weakness in the eurozone but also in parts of Asia.

The survey will add to fears over the underlying health of the recovery amid warnings that the return to economic growth in the third quarter masked deeper problems.

Rob Dobson, Markit senior economist, said: "While the road to an export-led recovery is still blocked by the ongoing difficulties in the eurozone, it is concerning to hear further reports of the global slowdown hurting trade with other regions such as Asia.

"All of this is placing manufacturers on a cautious footing, especially regarding costs, which will filter through to the wider economy."

There were signs that the surprisingly resilient labour market might be faltering as manufacturing employment declined for the second successive month in October, reflecting low demand.

Meanwhile, the Bank of England will be troubled as cost inflation hit a seven-month peak, further squeezing margins.

The Bank had expected inflation to fall rapidly to the 2% target by the end of this year but recent developments - such as higher oil prices and utility bill hikes - have thrown this into doubt.

There were some brighter spots for manufacturers, the survey said, as the consumer goods sector bounced back strongly from September's contraction.

Howard Archer, chief UK and European economist at IHS Global Insight, expects manufacturing output to contract in the final quarter of the year, while overall GDP growth slows from the current 1% estimate for the third quarter to 0.2%.

He said: "It is evident that manufacturers still face a tough environment. Domestic demand for manufactured goods is handicapped by current muted investment intentions and tightening public spending.

"Furthermore, the current uncertain and still difficult economic environment is likely causing some orders to be delayed or even cancelled."

PA