• Analysts fear European debt crisis may affect trade
A sharp slowdown in British export orders last month has sparked concerns that the recovery in manufacturing could soon run out of steam. The fall suggests that a stronger pound, coupled with the European debt crisis and signs of a slowdown in China and the rest of Asia, are starting to damage British sales overseas.
The Markit/CIPS manufacturing survey, a monthly snapshot of the sector, showed that a measure of export orders plunged to 50.7 last month from 56.7 in May, marking the weakest growth rate since last August. A reading of 50 indicates growth; below 50 signals an overall decline.
Overall, manufacturing recorded strong growth in June, down slightly from a 15-year high in May. The headline index edged down to 57.5 from 58.
"Looking three to six months ahead, manufacturers don't have a high degree of confidence," said Jeegar Kakkad, senior economist at the manufacturers' trade body EEF. "What happened in the last quarter of 2008, when within weeks orders melted away and the market fell off a cliff, made them a lot more cautious than maybe the statistics suggest."
He said that export growth earlier this year had been driven by shipments to Asia and the Middle East, while sales to Europe were also growing but not as fast.
Manufacturers are worried about the volatility of the pound against the euro in the wake of the Greek debt crisis. Sterling has strengthened to about €1.20 from €1.16 at the time of the election. This is affecting British exports of mechanical parts, such as machine tools and components for machine tools, to Germany.
A series of economic figures from China this week has sparked concern that its economic boom is running out of steam. Factory output in China is now falling, while Japan, South Korea, India and Taiwan have seen manufacturing growth slow.
UK exports to the US, especially consumer electronics, are also lacklustre, with American consumer confidence still weak, said Kakkad.
City economists said the recovery in British industry remained pretty robust – for now. Some were concerned that the European debt crisis was starting to affect trade. Peter Dixon at Commerzbank said it was having a "significant impact on demand".
Philip Shaw at Investec said: "The headline index has held up very well, it's not far off a 15-year high and ostensibly implying very strong growth in the manufacturing sector.
"But we're a little bit sceptical. The one obviously negative point is the large decline in the export index, which may be the first indication that the European debt crisis is impacting negatively on trade. It could be a one-off or it could be something more fundamental. We'll have to gauge next month's survey and other evidence to determine if this is the case."
Ross Walker at RBS concurred: "The big worry, of course, is still the euro area sovereign debt crisis damaging credit conditions and derailing the recovery." But he added: "It's still far too early to expect any of that to show up in the real economy."
On a more positive note, the survey suggested that manufacturers are hiring again. The measure of employment grew at the sharpest rate since February 1995.
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