A slump in demand from abroad knocked the UK manufacturing sector sideways in August, reinforcing expectations that the Bank of England will not rush to raise interest rates again at its meeting next week.
A snapshot survey of the industry implied that UK manufacturers are already feeling the pinch from a weakening in demand in the US, where the economy has slowed sharply since the start of the year.
The Chartered Institute of Purchasing and Supply's (Cips) index of export orders dropped from 53.9 in July to 48.3 last month, the first time it has signalled a contraction since January and the lowest level since May 2005.
British manufacturing growth slowed for a second consecutive month, wrong-footing economists. The main cause was a slowdown in the rate of new orders, which grew at their weakest pace in five months in August. The fall in export orders came after sterling jumped to two-year highs in the past month on expectations that the Bank of England's Monetary Policy Committee will have to lift rates again to temper inflation, which at 2.4 per cent has remained stubbornly above its target.
A stronger pound has meant that British exporters have missed out on the upturn in the eurozone, their biggest market.
Cips said manufacturers enjoyed solid demand from domestic customers, but "companies reported that they had faced strong competition in foreign markets in August".
Paul Dales, UK economist at Capital Economics, said: "The fall [in export orders] is particularly worrying at a time when activity in the eurozone remains robust and could be the first sign that the strength of the sterling exchange rate and a weakening in demand in the US are starting to hurt the UK economy."
Ross Walker, at Royal Bank of Scotland, which helped compile the survey, said the outright fall in export orders "may be the most significant feature of August's survey ... as the Bank of England's above-trend economic growth forecasts rely in part on a positive contribution to GDP from net trade."
The survey also noted that capacity constraints and a short supply of commodities were problematic, highlighting inflationary risks. Although none of the 54 economists polled by Reuters expected rates to be lifted to 5 per cent on Thursday, 40 have pencilled in a quarter-point increase for November, given the recent housing market revival and robust retail sales data.Reuse content