Jul 01

Manufacturing hit by high inflation and weak demand

Britain’s manufacturing sector contracted last month at the fastest rate since 2001 while factory-gate inflation hit record levels, a survey showed today.

Output and new orders fell at the sharpest rate for almost a decade, but inflationary pressures also picked up, with raw material costs and factory-gate prices rising at the fastest pace since the series began more than 16 years ago.

Sterling, which had been poised to break through the $2 barrier, fell back to $1.9975 by 10.20am. The FTSE 100 index dropped 132.5 points to 5493.4 points, a fall of nearly 2.4%.

The Chartered Institute of Purchasing and Supply/Markit index of manufacturing fell to 45.8 in June from 49.5 in May. Any reading below 50 indicates contraction. It was the weakest number since December 2001, when manufacturing suffered a sharp drop in activity after the September 11 attacks in the US.

"The UK manufacturing sector buckled under the weight of a brutal combination of survey record cost inflation and weak domestic demand in June," said Rob Dobson at Markit Economics.

The output index tumbled to 43.5 last month from 49.2 in May, marking the worst decline in production since 1998. Companies cut back production to clear backlogs at the fastest pace in the history of the survey.

New orders also fell at the fastest rate since 1998. Export orders registered their lowest reading for almost two years.

The index measuring manufacturers’ costs surged to 82.1. Manufacturers are managing to pass on costs to their customers, with the output price index rising to 62.6. Output prices have now risen for the last 35 months without let-up, the longest period of factory-gate inflation in the history of the series.

"Obviously prices are still going up but to the extent you are getting declines in activity, it will eventually pull down price inflation," said George Buckley at Deutsche Bank. "Certainly this does put paid to any risk of a rate hike in the near term and we still think the next move will be down."

Analysts are divided over whether the next move in interest rates will be up or down. Last week, Mervyn King, the governor of the Bank of England, tried to calm fears that the Bank was about to raise rates, saying the MPC thought inflation would fall next year and did not want to force the economy into a "deep and prolonged recession".