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UK manufacturing rebound suggests recession could be averted

Economists say ‘vast improvement’ in manufacturing at start of year suggests return to recession ‘is by no means a certainty’

Government hopes that the latest UK economic downturn will prove to be a blip have been boosted by news that Britain’s manufacturers enjoyed a strong start to 2012, as their output grew at the fastest pace in almost a year.

Contrasting with a manufacturing slump that dragged down overall growth last quarter, the closely watched purchasing managers’ index (PMI) survey for January was more upbeat than expected and was taken by some economists as evidence recession can still be averted. The report suggested activity at Britain’s factories had recovered in January to the strongest since last May and orders were rising.

But their eurozone counterparts did not fare so well as they continued to battle fierce austerity measures and weakened confidence. A similar survey for the single currency area suggested manufacturers there continued to see activity and orders slowing.

In the UK, the headline activity reading rose to 52.1 in January from 49.7 in December on the Markit/CIPS UK manufacturing PMI. That was well above the 50 mark that divides contraction from expansion and stronger than a forecast for 50.0 in a Reuters poll of economists.

The news that orders also rose for the first time in seven months brings some respite for the government after official data last week revealed the economy shrank 0.2% in the final months of 2011. Economists said the early signs from industry in 2012 suggested growth could rebound somewhat, avoiding recession, which is technically two consecutive quarters of contraction.

“Manufacturing was a key area of weakness which caused the UK economy to contract in the final quarter, so this surprising rebound in January means a return to recession is by no means a certainty,” said Rob Dobson, senior economist at survey compilers Markit.

The survey also showed output expanded at the fastest pace since last March, new orders rose following a period of contraction and employment numbers stabilised as large firms laid off staff but smaller manufacturers hired new workers. Cost pressures on manufacturers continued to ease, as average input prices fell for the third straight month.

David Tinsley, UK economist at BNP Paribas commented: “We believe that the UK will avoid recession and post some positive, if moderate, growth in the first quarter… It’s clearly early days, but the outlook for the economy has distinctly improved over the last few months.”

As UK manufacturers are urged by politicians and lobby groups to look beyond traditional trading partners in the troubled eurozone, there were modest signs of demand further afield picking up. Manufacturers reported improved orders from clients in Brazil, China, the Middle East and the US.

But with manufacturing making up just 10.2% of the UK economy, analysts said a report on the dominant services sector due on Friday would be more telling for the overall UK outlook.

There were also concerns that headwinds from the eurozone show little sign of easing. PMI surveys from the eurozone on Wednesday showed manufacturing activity there declined for a sixth straight month in January. In Germany, business improved in the sector, but that was not enough to offset contraction elsewhere in the region.

Output rose but new order levels continued to decline and Markit’s eurozone manufacturing PMI remained well within contraction territory at 48.8, up from December’s 46.9.

UK-based economists said that the strains in the eurozone, and signs inflation is easing, left the door open for the Bank of England to pump more money into the economy when it announces its latest policy moves next week. Such an extension of the Bank’s quantitative easing (QE) programme is widely expected but policymakers could choose to raise it by a little less than previously expected following the upbeat manufacturing report.

“The consensus is split between an additional £50bn or a £75bn instalment of QE,” said Alan Clarke, economist at Scotiabank. “This survey, in conjunction with the firming survey data in the eurozone, suggests that the lower of the two is more likely and there could even be speculation that the Bank might sit on its hands.” © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds