Huge setback for economy as shock fall in manufacturing activity points to triple-dip recession

British manufacturing has dropped to worrying levels in February

It was at 47.9 last month, below 50 mark that splits growth and contraction

Mortgage approvals also fell when a rise had been predicted

Experts fear news will slash GDP and dump Britain into triple-dip recession

Fears that Britain is heading for a triple-dip recession were reignited today after new official figures revealed a shock fall in manufacturing.

The industry contracted in February for the first time since November, falling to 47.9 according to the latest Markit/CIPS purchasing managers’ index (PMI).
The headline reading is considerably below the 50 level that separates growth from contraction, with activity hit by Britain's poor weather and tough economic conditions at home and abroad. 
The contraction in manufacturing marks a considerable setback, increasing the likelihood that output in the sector has dropped by as much as 0.5 per cent this quarter, which will act as a significant drag on the wider economy. 
The sector contributed to the worse-than-expected 0.3 per cent decline in gross domestic product (GDP) in the fourth quarter of 2012.

The GDP blow has raised fears that the UK is heading for an unprecedented triple-dip recession if the economy contracts again this quarter.

The Markit/CIPS Manufacturing PMI contracted to 47.9 in February, new figures reveal

Sterling tumbled to a fresh two-and-a-half-year low against the dollar following the news. It fell nearly one per cent to $1.5011, its weakest level against the dollar since May 2010.

The figures come at the end of a week of bad news for the economy, in which the UK was stripped of its prized AAA rating by Moody’s and new data confirmed GDP contracted by 0.3 per cent in the final quarter of last year.

 

Chris Williamson, chief economist at Markit, said: ‘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.
‘The data so far this year point to manufacturing output falling by as much as 0.5 per cent, 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.’

Difficult times: UK manufacturing contracted last month, stoking fears the economy is heading for a triple-dip

The disappointing figures will put more pressure on the Bank of England to resume money printing – or quantitative easing.

The most recent minutes signalled a split in the committee, with governor Sir Mervyn King and Paul Fisher joining previously lone voice David Miles in calls to restart the printing presses.
David Tinsley, UK economist at BNP Paribas predicted that the figures bring the chance of further quantitative easing up to about 45 per cent. 'It's a very disappointing set of data and makes next week's Bank of England policy decision very finely balanced,' he said.
The sector also saw its greatest fall in employment for 40 months, with large enterprises making the biggest cuts as they continued to shed backlogs of work. Some reported spare capacity.
David Noble, chief executive of the Chartered Institute of Purchasing & Supply, said the figures were a ‘reality check’ for the manufacturing sector.
He said: ‘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.
‘Moreover, the sector seems to continue to grapple with the ongoing problems of playing hostage to European fortunes, whilst unable to fully take advantage of emerging growth markets,’ he added.

Graph showing GDP estimates and revisions from the last quarter of 2008 to the end of 2012 (Source: ONS)

New export orders declined for the 14th successive month as growth in emerging markets was offset by weak demand in Europe.
But Howard Archer, chief UK and European economist at IHS Global, said signs that eurozone activity bottomed out around October did offer some hope for UK manufacturing exporters.
He said: ‘In addition, sterling's sharp recent retreat will be largely welcomed by UK manufacturers as it should boost their competitiveness both in foreign and domestic markets.’
But he warned the pound's weakness could lift manufacturers' costs for imported materials and parts.
The figures showed manufacturers had increased prices as they battled rising costs into the start of 2013, but there were signs that costs fell marginally during February following negotiations with suppliers.
The housing sector also revealed signs of weakness.

Mortgage approvals fell to 54,719 in January from 55,632 in December, short of analysts' forecasts for a rise to 56,500, the central bank said.

A rise in the flow of credit in recent months, particularly in home loans, fed hopes that the BoE's flagship Funding for Lending Scheme is helping home buyers, though lending to companies remains sluggish.
Mortgage lending grew by £147million, the smallest increase since August, also less than forecast.