'Perfect storm' hits manufacturing

Britain's recovery hopes were dashed today as a closely-watched survey revealed the worst manufacturing performance in more than three years in July.

The latest Markit/CIPS purchasing managers' index (PMI), where a reading above 50 represents growth, was 45.4 last month, contracting for a third month in a row following readings of 48.6 and 45.9 in June and May respectively.

A "perfect storm" of wet weather, weak confidence and the continuing eurozone crisis was behind the dire performance with output, new orders and exports all sliding.

The figures come after PMI data in China revealed the slowest growth in manufacturing in eight months while eurozone figures figures fell to a 37-month low, with only Ireland bucking the trend out of eight single-currency countries.

Howard Archer, chief UK and European economist at IHS Global Insight, said the UK figures were "absolutely dreadful".

He said: "The survey is massively disappointing and worrying, indicating that the manufacturing sector's problems are currently running deep."

The worse-than-expected survey comes after official figures revealed a further contraction in the overall economy between April and June of 0.7% - the biggest drop in gross domestic product (GDP) since the height of the financial crisis three years ago.

It was the third quarter in a row that the economy has contracted, meaning the UK is now mired in the longest double-dip recession since quarterly records began in 1955 - and possibly since the Second World War.

Some economists warned that the weak start for the manufacturing sector in the third quarter casts doubt on the UK's prospects after many forecast a bounceback as businesses made up for lost time from the additional bank holidays.

Output and new orders both contracted sharply during July, as companies faced weaker demand from domestic and export clients, Markit said, with the decline in production being the steepest for 40 months.

There was a contraction in the intermediate goods sector - sub-components later used in the manufacture of another product, such as a gear box in a car - and investment goods such as machinery. Output rose slightly at consumer goods producers.

The level of new export business declined for the fourth month running and at the fastest pace since February 2009, Markit said.

The continuing weakness of the eurozone market remained the principal drag on new export orders, although there were also some reports of a decline in new business received from Asia.

Samuel Tombs, UK economist at Capital Economics, said: "Today's survey is a pretty strong indication that, temporary factors aside, underlying conditions in the UK's manufacturing sector are getting worse."

Average input prices fell for the second straight month, while lower purchasing costs were linked to reduced commodity, oil and plastic prices.

Average selling charges rose further in July as manufacturers continued to pass on the higher raw material prices incurred earlier in the year.

There were some positive developments as manufacturing employment rose slightly for the first time in three months during the month.

Companies indicated that staffing levels had risen to complete outstanding contracts and as part of planned company expansions, Markit said.

The figures will increase pressure on Chancellor George Osborne to boost growth as detractors increasingly blame his tough austerity measures for the slump in the economy.

Lee Hopley, chief economist at EEF, the manufacturers' organisation, said: "The Government will need to return from recess with a lot more clarity around its plans to get growth back on track."

PA