U.K. Factory Output Plunges the Most Since Financial Crisis

U.K. manufacturing shrank last month at the fastest pace since the depths of the financial crisis in 2009 as demand plunged.

A gauge of factory output dropped to 45.9 from 50.2 in April, Markit Economics said on its website today. That’s the lowest since May 2009 and the first time in six months the gauge is below 50, which indicates contraction. The pound fell after the report was released.

The drop increases the chances of the Bank of England resuming stimulus after it halted its quantitative-easing program last month, according to ING Group and Deutsche Bank AG. Separate reports today showed manufacturing indexes in China and the euro area also fell last month, and the British Chambers of Commerce cut its U.K. growth forecast, saying the economy will barely grow this year.

“The harsh realities of the weak global economy and sluggish domestic demand are bearing down on U.K. manufacturing,” CIPS Chief Executive Officer David Noble said. “The sector could well become a drag on the U.K. economy as it seeks a return to better health.”

The pound extended its decline against the dollar after the survey was published and traded at $1.5288 as of 10:16 a.m. in London, down 0.8 percent from yesterday. Government bonds rose, pushing the yield on the 10-year gilt down 6 basis points to 1.511 percent.

Orders Plunge

The decline in the manufacturing gauge was larger than economists had expected. The median forecast of 30 economists in a Bloomberg News survey was for a decline to 49.7 from an initial estimate of 50.5 in April.

A measure of new orders dropped in May to the lowest level since March 2009, while job losses were reported for the first time in five months and price pressures eased, Markit said. Manufacturing industries that weakened included chemicals and plastics, electrical, mechanical engineering, textiles and clothing and transport.

Companies indicated that lower output “reflected weaker global economic conditions, rising competition and a subdued domestic market,” Markit said.

The decline “may have been sharper had it not been for a marked reduction in backlogs of work, as companies diverted spare capacity towards completing existing contracts,” it said. “There were reports of clients destocking and postponing expenditure in response to uncertain economic conditions.”

BOE Stimulus

It “has increased dramatically the likelihood of the Bank of England announcing more QE” next week, Deutsche Bank economist George Buckley in London said in a note today. “With conditions having worsened in Europe, a bounce back to more normal levels of activity growth seems unlikely any time soon.”

The Bank of England’s Monetary Policy Committee is due to announce its decision on June 7. It held its bond-purchase target at 325 billion pounds ($498 billion) last month.

Data on May 24 showed Britain’s economy shrank 0.3 percent in the first quarter, more than initially estimated. Gross domestic product will probably rise 0.1 percent this year, the BCC said in a report, cutting a previous forecast for growth of 0.6 percent. It sees expansion of 1.9 percent in 2013.

“Ongoing problems in Europe will persist for some considerable time and cause difficulties for U.K. businesses,” the lobby group said. “Although there will be minimal growth this year, economic prospects will gradually improve.”

A separate report from Markit showed euro-area factory output shrank for a 10th month in May. In China, a manufacturing index fell to 50.4 from 53.3 in April, China’s statistics bureau and logistics federation said. That’s the weakest pace since December. A separate China gauge from HSBC Holdings Plc and Markit showed a seventh straight contraction, the longest since the global financial crisis.

The Institute for Supply Management Inc.’s U.S. factory index probably fell to 53.8 in May from a 10-month high of 54.8 the previous month, according to the Bloomberg survey ahead of a report later today.

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