UK manufacturing shrinks unexpectedly in February, triggers slide in the pound

A shock contraction in British manufacturing last month dragged the pound below the psychologically important $1.50 mark for the first time since June 2010, as tough conditions both at home and abroad indicated that the sector will drag down growth in the first quarter.

The Markit/CIPS Manufacturing Purchasing Managers' Index (PMI) fell to 47.9 from 50.5 in January, well below the 50 level that divides growth from contraction, as employment levels in the sector fell at their sharpest levels in more than three years. Photo: Alamy

 

 

 

The Markit/CIPS Manufacturing Purchasing Managers' Index (PMI) fell to 47.9 from 50.5 in January, well below the 50 level that divides growth from contraction, as employment levels in the sector fell at the fastest pace in more than three years.

The pound sank by one-and-a-half cents against the dollar, which strengthened on the back of disappointing Canadian GDP data, to $1.4998, and by almost a cent against the euro to €1.152, as economists described the data as "very disappointing".

_{The pound dived by almost a cent against the euro on the back of the data (source: Bloomberg).}

Chris Williamson, chief economist at Markit, said the data represented a "major set-back to hopes that the UK economy can return to growth in the first quarter and avoid a triple-dip recession".

"The data so far this year point to manufacturing output falling by as much as 0.5pc, 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," he said.
Bad weather at the end of January and a larger than expected disruption caused by the Chinese New Year holiday on global trade flows saw new orders fall for a second successive month, Markit said.
The degree of job shedding was the fastest for 40 months, it added, with large-sized enterprises making the steepest cuts.
Analysts said sterling, which has already fallen around 7.5pc against the dollar this year, could fall further if services PMI data next week also painted a bleak picture of the UK.
“The pound is extremely sensitive to domestic fundamentals right now,” said Kathleen Brooks at forex.com. “If we see a miss in the service sector PMI when it is released on Wednesday, this could be the trigger for a sharper move lower in the pound.”
Kit Juckes, head of foreign exchange at Societe Generale, said that the pound could fall towards the $1.40 level. "There is no other path," he said.
Britain’s services sector powers more than three-quarters of the UK economy, compared with 11pc for manufacturing. Some analysts said the data could persuade Bank of England policymakers to restart the printing presses at their monthly interest rate meeting next Thursday.
David Tinsley at BNP Paribas said that there was "about a 45pc chance of more QE next week".
However, Mr Williamson added that the weaker pound and a rebound in orders following the recent bad weather spell could help exporters recover in March.
Separate data by Markit on Friday showed that the downturn in the eurozone's manufacturing sector continued in February, despite a stronger performance by Germany, Europe's largest economy.
Markit's final eurozone manufacturing PMI came in at 47.9 in Febraury, compared with an initial estimate of 43.8, as business conditions deteriorated for a nineteenth successive month.

Mr Williamson said the data indicated that eurozone GDP would fall for a fourth successive quarter in the first three months of the year, and that the divide in eurozone manufacturing trends continued to "diverge strongly".
"German producers reported the first overall improvement in business conditions for a year, contrasting with steep downturns in France, Spain and Italy," he said.
“The combination of a revival in export orders and resilient domestic demand has helped propel Germany’s growth so far this year, while deteriorating domestic demand is holding back the economies of France, Italy and Spain. “
The unemployment rate in the eurozone also touched a fresh high of 11.9pc in January from 11.8pc in December. More than 19m people are now out of work in the 17-nation bloc, Eurostat said.