Exports still hit by eurozone fears

The UK's manufacturing sector contracted for the second month in a row in June as the eurozone debt crisis continued to weigh on exports.

The latest Markit/CIPS survey, where a reading above 50 represents growth, was at 48.6, although this was up from a three-year low of 45.9 in May and slightly better than City expectations.

Levels of output rose following sharp declines the previous month, but new business wins and overseas demand both contracted for the third month amid the eurozone crisis and slowing growth in the US and Asia.

The Queen's Diamond Jubilee distorted the picture for June, but the latest reading suggests the sector's output is set to decline at least 0.5% in the second quarter of 2012, Markit said, fuelling fears that the UK's double-dip recession will continue.

The sector made job losses for the second month in a row, reflecting weak demand, and CIPS chief executive David Noble warned that further cuts loom unless orders recover.

He said: "The effects of the eurozone crisis and global economic slowdown are making it a tricky time to build on exports."

Markit senior economist Rob Dobson said the increase in production in June "provides hope that the wheels have not fallen off the manufacturing economy" amid resilience from the consumer goods sector.

But he added: "There's no denying that the second quarter as a whole is looking weaker than the first quarter, suggesting manufacturing output may have contracted by at least 0.5% and, therefore, acting as a substantial drag on the economy."

However, there was some good news as average input prices fell at their fastest rate for three years amid lower chemical, energy and food costs.

Although average selling prices continue to rise as companies recovered profit margins, Samuel Tombs, UK economist at Capital Economics, predicted that further weakness in demand could prompt "outright price cuts".

Mr Tombs added: "With other sectors showing few signs of growth, it seems increasingly likely that the overall economy remains in recession."

The reduction in price pressure and the weak performance of the sector will ramp up expectations that the Bank of England will fire up its money printing presses for another dose of quantitative easing this week to boost the economy.

PA