UK manufacturing downturn may spur interest rate cut
The health of the UK's manufacturing sector continues to deteriorate, experts warned, after it emerged today that factory output had declined for the first time in more than two years.
Economists said the May data from the Chartered Institute of Purchasing and Supply (CIPS) confirmed a sustained industry downturn, which they also believed increased the chances of an interest rate cut this year.
As well as the contraction in manufacturing production, CIPS said its monthly barometer of all activity in the sector revealed the worst figure for two years.
With an overall reading of 47.3 in May – anything below 50 indicates a decline - the performance mirrored the disappointment of the previous month.
Production output fell below the 50 mark for the first time in more than two years, while the rate of decline in new orders was the sharpest since March 2003, which firms blamed on competition from abroad, weaker demand from export markets and the domestic economy.
Economist David Page at Investec Securities said: “There are really no redeeming features to this report. It does paint a very gloomy picture for the manufacturing sector and points towards a renewed downturn in the industry.”
He said recent strong data from the services sector was likely to support economic growth, but the Bank of England’s Monetary Policy Committee (MPC) may be more likely to cut interest rates if the manufacturing decline continued.
He said: “If manufacturing is heading for a renewed slowdown, it significantly raises the possibility that the MPC could cut rates this year.”
Interest rates have remained on hold at 4.75% for nine months and many experts are expecting no change for the rest of the year.
Today's survey also showed output prices fell for the first time in 20 months.
Vicky Redwood at Capital Economics said some of the weakness could be down to the closure of carmaker MG Rover, as this was the first full month since production stopped.
But she added: “As this survey has been on a downward trend since the summer, it is more likely to be the result of weakening activity, both at home and overseas.”
She continued to believe the MPC would vote for a cut in rates before long.
Simon Rubinsohn, chief economist at fund manager Gerrard, said economic growth would have to fall some way short of the Bank’s expectations over the year to justify a reduction. “At this stage, there is insufficient evidence to confidently forecast such an outcome,” he added.
