U.K. Factory Slump Ease Adds to Case for BOE to Hold QE: Economy

U.K. Manufacturing Rebounds More Than Forecast, Markit Says
An employee works on the chassis of an Enviro 400 bus in London bus livery, inside a workshop at Paxton Ltd's assembly plant, part of the Alexander Dennis Ltd. group, in Scarborough. Photographer: Paul Thomas/Bloomberg

A U.K. manufacturing index rebounded more than economists forecast in August as output barely contracted, adding to the case for Bank of England policy makers to refrain from injecting further stimulus into the economy.

A gauge based on a survey of purchasing managers surged to 49.5 from 45.2 in July, Markit Economics and the Chartered Institute of Purchasing and Supply said in London today. Economists had forecast an increase to 46.1, according to the median of 28 estimates in a Bloomberg News survey. A reading below 50 indicates contraction.

The Bank of England will maintain its quantitative-easing program this week as officials assess the impact of their bond purchases and measures to boost credit. The central bank cut its economic forecasts last month amid the continuing debt turmoil in the euro area, where a report today showed factory output shrank more than initially estimated in August.

The U.K. report “reinforces belief that the BOE is highly likely to keep all aspects of monetary policy unchanged” this week, said Howard Archer, an economist at IHS Global Insight in London. “Nevertheless, further QE remains very much on the cards for the fourth quarter.”

The pound rose against the dollar after the report and was trading at $1.5887 as of 11:32 a.m. in London, up 0.1 percent on the day. Government bonds fell, with the yield on the 10-year gilt up 1 basis point at 1.64 percent.

Pressure Eases

Producers of consumer goods increased output last month and a “severe decline” in new orders caused by Europe’s debt turmoil eased to a “broad stagnation,” Markit and CIPS said.

While manufacturers saw inflows of new work hold broadly steady in August, this followed four consecutive months of contraction. The rate of decline in new export orders also eased sharply and manufacturing employment increased for a second month. Factories continued to raise their average selling prices, reflecting efforts to recover some of the margin lost earlier in the year.

“We have witnessed a return to the status quo of flat growth in a fragile economy,” CIPS Chief Executive Officer David Noble said. “This optimism, however, is set firmly in the context of a slowing global economy. The U.K. manufacturing sector continues to struggle against economic headwinds, especially from Europe.”

Markit’s index of U.K. construction companies due to be published tomorrow may show the industry stagnated last month, while a services measure on Sept. 5 may show growth accelerated, economists said in separate polls.

BOE Decision

The services report comes a day before the Bank of England announces its latest monetary-policy decision. The Monetary Policy Committee, which will complete a 50 billion-pound ($79 billion) round of bond purchases in November, will maintain its current target at 375 billion pounds on Sept. 6, according to 38 out of 39 economists in a Bloomberg survey. It will also leave the key interest rate at a record-low 0.5 percent, all 51 economists said in a separate poll.

The Confederation of British Industry and the British Chambers of Commerce both urged the government to take measures to stimulate growth last week as they forecast the economy will contract this year.

The Engineering Employers’ Federation cut its forecast for manufacturing today and said the industry will shrink 1.5 percent this year before growing by a similar amount in 2013. The lobby group previously estimated growth of 0.1 percent and 2.2 percent respectively. A quarterly survey by the EEF showed factory output and orders dropped to their lowest levels in almost three years last month.

Monetary Stimulus

European stocks rose for a second day on speculation central banks will take more steps to boost growth as reports signaled the economic slowdown is deepening. The Stoxx Europe 600 Index added 0.6 percent, while the German and French equity benchmarks also rose. The U.S. market is closed for the Labor Day holiday.

Federal Reserve Chairman Ben S. Bernanke said Aug. 31 that he wouldn’t rule out more stimulus. European Central Bank President Mario Draghi may unveil details of a revival of a bond-purchase program after a policy meeting in Frankfurt on Sept. 6.

In the euro area, a manufacturing index was at 45.1 in August, below the 45.3 initially reported, Markit said today. The gauge, which stood at 44 in July, has been below 50 for 13 months. A Chinese manufacturing measure by HSBC Holdings Plc and Markit was at 47.6, indicating the fastest contraction in more than three years.

Elsewhere, Sweden’s manufacturing unexpectedly shrank in August at the fastest pace since May 2009 as the krona’s appreciation sent export orders plunging amid sagging demand from debt-stricken euro area.

The purchasing managers’ index fell to a seasonally adjusted 45.1 from 50.6 in July, Stockholm-based Swedbank AB, which compiles the gauge, said today. The index was seen falling to 50.1, according to the average estimate of 10 economists surveyed by Bloomberg.

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