U.K. Factory Gauge Shows Expansion, Easing Recession Concern

U.K. manufacturing expanded for a second month in February, adding to signs the economy hasn’t slipped back into recession after a fourth-quarter contraction.

The factory gauge, based on a survey by Markit Economics and the Chartered Institute of Purchasing and Supply, declined to 51.2 from 52.0 in January, Markit said in a report on its website today. A reading above 50 indicates expansion. The figure was below the median forecast of 52 in a Bloomberg News survey of 26 economists.

“U.K. manufacturers continued to raise production and employment in February, building on the solid foundation seen so far at the start of 2012,” Rob Dobson, senior economist at Markit, said in the statement. Still, the report points to “headwinds faced by manufacturers” amid “reports of weak demand from the eurozone offsetting new business wins in the U.S. and Asia.”

The report follows data published today showing China’s factory output quickened last month while India’s continued to grow. Bank of England policy maker Martin Weale said yesterday signs of growth and inflation risks suggest the U.K. economy won’t need more stimulus once the current round of bond purchases ends.

The U.K. economy shrank 0.2 percent in the fourth quarter as companies cut investment. Manufacturing contracted 0.8 percent in the period. However, the CIPS’s January surveys for manufacturing and services showed expansion, and government data published Feb. 24 showed consumer spending rose 0.5 percent in the final three months of 2011 in the first increase for 1 1/2 years.

‘Downside’ Risks

“Given the headline index remains above the break-even 50 level the report offers hope that the U.K. can avoid a technical recession,” James Knightley, an economist at ING Bank NV in London, said in an e-mailed note. “However, it is going to be a bumpy ride. Risks to growth remain skewed to the downside.”

Factory output, which accounts for about 10 percent of U.K. gross domestic product, is benefitting from the pound’s drop of about 25 percent on a trade-weighted basis since the start of 2007. Exports gained 2.3 percent in the fourth quarter and net trade contributed 0.6 percentage point to gross domestic product.

Glasgow, Scotland-based Weir Group Plc, the world’s biggest maker of pumps for the mining industry, said yesterday it had a “strong order book” for 2012. Chief Executive Officer Keith Cochrane said the company expects “a year of further good progress.”

Caution Urged

Still, Bank of England Deputy Governor Charles Bean yesterday cautioned lawmakers against putting too much weight on positive signs in the economy. Policy makers’ latest quarterly economic forecasts show the government’s fiscal squeeze and the sovereign debt crisis in Europe will weigh on the recovery. A report today showed manufacturing continued to shrink in the euro-area.

“There have been a few positive signs, but I think it’s important not to read too much into one or two indicators rising to the upside,” he said in testimony in Parliament yesterday. “It’ll take a lot more swallows to make a summer.”

The Bank of England increased its bond-purchase program by 50 billion pounds ($80 billion) last month to 325 billion pounds, and said it will complete the new round of asset purchases by May.

Consumption “appears to be growing again” and “indicators of the state of the economy this year have been more positive,” Weale said late yesterday. “I do not think there is likely to be a further case once our current program is complete.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE