Manufacturing shrinks for first time in two years


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The Independent Online

Manufacturing is contracting for the first time in two years, according to one of the most reliable surveys of activity in the sector. The Markit/Cips manufacturing purchasing managers' index (PMI) fell to 49 in August, the weakest reading since June 2009. Any figure under 50 indicates a contraction in activity.

Rob Dobson, a senior economist at Markit, said: "The second half of 2011 has so far seen the UK manufacturing sector, once the pivotal cog in the economic recovery, switch into reverse gear."

The news will be a bitter disappointment to George Osborne, who has repeatedly emphasised that he wants to see a UK recovery driven by a reinvigorated manufacturing sector. In his Budget speech in March, the Chancellor said: "We want the words 'Made in Britain', 'Created in Britain', 'Designed in Britain', 'Invented in Britain' to drive our nation forward. A Britain carried aloft by the march of the makers."

The Markit/Cips index, which is based on a survey of purchasing executives at more than 600 firms, has now fallen by 12.5 points in six months. Those questioned attributed the fall in activity to weak domestic demand, rising global economic uncertainty and weaker export markets.

The level of new orders from overseas fell at the fastest pace since May 2009. Just last December exports were growing at record levels. August also saw manufacturing employment fall for the first time in 17 months, albeit only slightly.

Samuel Tombs, of Capital Economics, said: "All in all, the Cips survey highlights the risk that the industrial sector – and perhaps even the overall economy – is heading for a double-dip". This is likely to add to the pressure for the Bank of England to engage in another round of quantitative easing in order to stimulate the economy.

A faint silver lining in the latest survey is that commodity price pressures eased in August. Input costs for manufacturers rose at their slowest pace in 20 months. "This provides support to the Bank of England's belief that inflationary pressures are temporary and offer room for manoeuvre if any further stimulus is required", Mr Dobson said.

PMI surveys across Europe in August have also pointed to a contraction. And yesterday a purchasing managers' index by the Institute for Supply Management showed that national factory activity in the United States edged down to 50.6 from 50.9 in July.