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Manufacturing activity rise boosts Osborne

• UK manufacturing PMI hits 51.1 for September
• Fears eurozone problems will hit UK economy
• Analysts fear return to recession in third quarter

The chancellor George Osborne gained some welcome relief on Monday as figures showed the manufacturing industry expanded slightly in September, but analysts said a fall in export orders and a rapid slowdown in growth across the eurozone showed the UK economy would struggle in the coming months.

The gathering storm around the Greek economy, which continues to deteriorate despite rescue efforts from Brussels, also threatens to wreck Osborne’s recovery plans, which rely heavily on exports to major trading partners in Europe.

Greece said over the weekend it would struggle to contain its ballooning debts this year and next, leading to a huge sell-off in shares across the world.

Falling export orders took a bigger toll on factory activity in Europe and Asia, which slumped during September to levels not seen since the depths of the financial crisis, reinforcing fears of a return to recession.

Corresponding figures for the US due later on Monday are expected to underscore the gloomy outlook for the global economy.

Even in China, which reported a slight increase in its official PMI, economists saw evidence of a cool-down. China’s factory activity typically rises in September as businesses prepare for the Golden Week holiday, but this year’s increase was smaller than the average.

“There was no reason to be cheerful, as this was in fact the weakest September reading ever and was on tie with that in 2008,” said Yao Wei at Société Générale.

Markit’s eurozone manufacturing Purchasing Managers Index (PMI), which gauges changes in the activity of thousands of factories in the countries that share the euro, fell to a final reading of 48.5 in September from 49.0 in August.

The FTSE declined by more than 2% after similar falls in far eastern markets. Commodities also fell as traders agreed declining figures for world trade pointed to a sharp slowdown in the use of raw materials.

Critics of the government’s economic policies are expected to say that the modest reverse in manufacturing output will prove short-lived and do little to boost jobs or promote growth across the wider economy.

The Markit PMI for the UK manufacturing industry was 51.1 when it was expected to show a further fall from its August level of 49.4. A figure above 50 indicates the sector is expanding.

Back in January the PMI stood at 61.4 and was heralded by government supporters as an indication that the Treasury’s focus on keeping international money markets at bay with severe austerity measures was working.

Since the spring, confidence in the UK’s ability to grow has evaporated and manufacturers have joined other parts of the economy in decline.

Many analysts fear the UK will fall back into recession in the third quarter, hitting tax receipts and increasing unemployment, which in turn will make it harder for the Treasury to pay down debts.

Samuel Tombs, UK economist at Capital Economics, said: “Output in the industrial sector might have increased a bit – but it still seems likely that the sector remained in recession in the third quarter as a whole.

“There are signs that the improvement in the survey in September will prove to be just a blip. A large part of the increase in output was only achieved by the fastest depletion in the backlog of work for two years. And the new orders balance only edged up from 48.0 to 50.5, reflecting the continued weakness of orders from overseas.” © 2011 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds