Manufacturing decline sparks triple dip fears

Group Business Editor

Monday 4 March 2013

UK manufacturing activity dropped sharply in February, with output, new orders, export business and employment all falling, according to a key survey that will fuel fears of triple-dip recession.

The survey, published yesterday by the Chartered Institute of Purchasing & Supply (CIPS), showed the steepest fall in employment in the sector for 40 months.

Chris Williamson, chief economist at CIPS survey compiler Markit, warned: “The return to contraction of the manufacturing sector is a big surprise and represents a major setback to hopes that the UK economy can return to growth in the first quarter and may avoid a triple-dip recession.”

He added: “The data so far this year point to manufacturing output falling by as much as 0.5%, meaning a strong rebound is needed in March to prevent the sector from acting as a drag on the economy as a whole in the first quarter.” CIPS’ headline purchasing managers’ index for the UK manufacturing sector, a composite measure of activity including output, new orders, employment, suppliers’ delivery times and stocks of goods purchased, dropped from a downwardly revised 50.5 in January to 47.9 in February, on a seasonally adjusted basis. This took it back below the level of 50, which according to CIPS separates expansion from contraction. Economists had predicted a rise to 51. UK manufacturing employment fell for a seventh consecutive month, and the pace of decline accelerated to its fastest since October 2009. CIPS’ manufacturing output index tumbled from 54.3 to 49.1. UK manufacturers’ new orders meanwhile fell for a second consecutive month in February, and the rate of decline accelerated. CIPS’ latest survey is another blow to Chancellor George Osborne’s hopes, spelled out in his March 2011 Budget, of a “Britain carried aloft by the march of the makers”. Samuel Tombs, UK economist at consultancy Capital Economics, said: “(The) survey added to evidence that it is touch and go whether the economy has avoided entering a triple-dip recession. There was not a shred of good news among the CIPS survey’s balances.” Mr Tombs described the sharp fall in manufacturing employment in CIPS’ survey as a tentative sign that the official overall UK labour market data “may not defy gravity for much longer”. UK gross domestic product dropped by 0.3% in the final three months of last year. A further fall in the current quarter would see the UK record its third recession since 2008. Mr Tombs said: “The CIPS survey... increases the chances of a further fall in GDP in Q1.” Howard Archer, chief UK economist at consultancy IHS Global Insight, said the survey was “very disappointing and not good news for first-quarter growth prospects”. The survey was viewed by economists as increasing the chances of the Bank of England’s Monetary Policy Committee increasing the scale of monetary stimulus, possibly even as early as next week, when it holds its monthly meeting. Bank Governor Sir Mervyn King was outvoted at the nine-strong MPC’s meeting last month, when he and committee colleagues Paul Fisher and David Miles pushed unsuccessfully for an immediate £25 billion rise in the scale of the quantitative easing programme to £400bn. QE is aimed at stimulating economic activity by boosting money supply through the purchase of Government and corporate bonds, using central bank reserves. David Noble, chief executive officer of CIPS, said of the manufacturing survey: “Of concern is the dearth of encouraging signs for the future. The sector witnessed a fall in new orders at home and a continued lack of demand abroad and, perhaps most ominously, we saw the greatest fall in employment for 40 months. “The sector seems to continue to grapple with the ongoing problems of playing hostage to European fortunes, while unable to fully take advantage of emerging growth markets.”

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Manufacturing decline sparks triple dip fears

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