U.K. Factory Output Shrinks Most in More Than Three Years

U.K. manufacturing shrank the most in more than three years in July as new export orders slumped, indicating the economy continued to weaken at the start of the third quarter.

A gauge of factory output, based on a survey by Markit Economics and the Chartered Institute of Purchasing and Supply, fell to 45.4 from a revised 48.4 in June, London-based Markit said today. The index was weaker than any of the 30 forecasts in a Bloomberg News survey and the pound weakened against the dollar and the euro. A reading below 50 indicates contraction.

British manufacturers are continuing to struggle as the sovereign debt crisis deepens in the euro area, the U.K.’s biggest trading partner. The Bank of England will probably maintain its target for bond purchases tomorrow as policy makers assess their Funding for Lending plan aimed at stoking the flow of credit.

“A perfect storm of wet weather and weak confidence in the U.K. has combined with global economic drift to engulf the manufacturing sector,” CIPS Chief Executive Officer David Noble said. “While the euro zone has continued to be the major factor, declines in business from Asia have dashed hopes of a quicker recovery.”

Economists had forecast a reading of 48.4 for the factory index, based on the median estimate. Markit said the level of new export business declined for a fourth month in July and at the fastest pace since February 2009. The euro area “remained the principal drag” on exports, it said.

Pound Drops

The pound weakened against both the dollar and the euro after the report, which may add to concerns about Britain’s economy after it shrank 0.7 percent in the second quarter. Sterling traded at $1.5650 as of 9:48 a.m. in London, down 0.2 percent from yesterday. It was at 78.67 per euro, weaker by 0.3 percent.

Euro-area manufacturing contracted for a 12th month in July, according to a separate report today. A gauge of manufacturing in the 17-nation region fell to a 37-month low of 44 from 45.1 in June.

Edinburgh-based Wolfson Microelectronics Plc (WLF), a U.K. maker of semiconductors whose technology is being used in Samsung Electronics Co.’s latest Galaxy smartphone, said yesterday that the global outlook continues “to be challenging.”

The Bank of England will probably keep its asset-purchase target at 375 billion pounds ($586 billion) tomorrow, according to all but one of 40 economists in a Bloomberg News survey. The central bank, which expanded stimulus last month, will also hold its benchmark interest rate at a record low of 0.5 percent, according to a separate survey.

“We don’t think it really alters the outlook for tomorrow’s Bank of England policy meeting,” James Knightley, an economist at ING Bank NV in London, said in an e-mailed note. “They only just announced another round of quantitative easing while the long heralded Funding for Lending Scheme only starts today.”

To contact the reporter on this story: Jennifer Ryan in London at jryan13@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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