U.K. Factory Index Rises as Signs of Recovery Emerge: Economy

Photographer: Paul Thomas/Bloomberg

Manufacturing remains under pressure amid weak demand in the euro area, the U.K.’s biggest trading partner, which is in a recession. Close

Manufacturing remains under pressure amid weak demand in the euro area, the U.K.’s... Read More

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Photographer: Paul Thomas/Bloomberg

Manufacturing remains under pressure amid weak demand in the euro area, the U.K.’s biggest trading partner, which is in a recession.

A U.K. factory index rose more than economists forecast in April, indicating that manufacturing barely shrank and adding to signs of an economic recovery.

The gauge increased to 49.8 from 48.6 in March, Markit Economics and the Chartered Institute of Purchasing and Supply said today in London, just below the 50 level that divides expansion from contraction. Economists had forecast a reading of 48.5, according to the median of 28 estimates in a Bloomberg News survey. The pound strengthened.

The report follows data last week showing that gross domestic product increased 0.3 percent in the first three months of the year, exceeding forecasts. Still, manufacturers remain under pressure amid weak demand in the euro area, the U.K.’s biggest trading partner, while a report today showed factory activity cooled in China last month.

There is a “glimmer of hope that the sector’s recession might be coming to an end,” said Samuel Tombs, an economist at Capital Economics Ltd. in London. “That said, these improvements are all coming from very weak levels.”

The pound was trading at $1.5570 as of 10:55 a.m. London time, up 0.2 percent from yesterday. Bonds declined, pushing the yield on the 10-year gilt up 1 basis point to 1.70 percent.

Export Demand

The Markit report showed that output and new orders rose last month for the first time since January. Manufacturers benefited from a “modest improvement” in new export orders, which they attributed to increased sales in North America, the Middle East, Latin America and Australia. There was also a “slight decline” in average purchase prices, with companies paying lower commodity and fuel prices, Markit said.

Manufacturing was one of the U.K. economy’s weak spots in the three months through March, shrinking 0.3 percent. Services rose 0.6 percent.

“It is welcome to see the sector showing signs of stabilizing,” Markit Senior Economist Rob Dobson said. “With forward-looking indicators such as new orders and the demand-to- inventory ratio also ticking higher, the sector should at least be less of a drag on broader GDP growth in the second quarter.”

Separately today, recruitment company Reed said its index of employment fell to 153 in April from 156 in March, which was a record. The index is up from 134 a year ago.

China Slowdown

In a sign of the fragility of the global recovery, a release in China today showed that manufacturing in the world’s second-largest economy expanded at a weaker pace in April. The Purchasing Managers’ Index was at 50.6, which compared with the 50.7 median forecast of 31 analysts in a Bloomberg survey and a March reading of 50.9.

U.S. manufacturing also probably cooled last month, economists said before a report today. The Institute for Supply Management’s factory index dropped to 50.6 from 51.3, according to the median forecast in a Bloomberg survey of 84 economists.

Nevertheless, U.S. companies probably added 150,000 workers in April after a 158,000 increase in March, economists forecast ahead of figures from the Roseland, New Jersey-based ADP Research Institute.

Markit will release its final March reading for euro-area factory activity tomorrow. An estimate published on April 23 fell to 46.5 from 46.8, adding to signs the economy is struggling. The European Central Bank (EURR002W) will cut its benchmark interest rate to a record low 0.50 percent from 0.75 percent tomorrow, according to the median of 70 estimates in a Bloomberg News survey.

The Bank of England’s Monetary Policy Committee left its target for quantitative easing unchanged last month, with Governor Mervyn King and two other officials defeated in a push for more stimulus. Since then, the BOE has expanded its program to boost credit to encourage lending to smaller companies. The MPC will have new forecasts for economic growth and inflation at its meeting next week.

“In terms of more BOE stimulus next week, the final nail was hammered into that particular coffin by the surprise first- quarter GDP figure,” said Rob Wood, an economist at Berenberg Bank in London. “But we continue to think further action is necessary and will be forthcoming.”

To contact the reporter on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net

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

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