U.K. Manufacturing Revives as Euro Factories Struggle: Economy

U.K. manufacturing unexpectedly expanded at the fastest pace in 15 months in December as domestic demand improved, indicating some strength in the economy at the end of 2012.

A gauge of factory activity rose to 51.4 from a revised 49.2 in November, Markit Economics and the Chartered Institute of Purchasing and Supply said in London today. The median forecast of 29 economists in a Bloomberg News survey was for a reading of 49.1, unchanged from November’s initially reported level. The pound stayed higher against the dollar after gaining to its strongest level in 16 months.

The report reduces the chance the U.K. will succumb to triple-dip recession after the economy resumed expansion in the third quarter and tensions related to the euro-region debt crisis eased. Still, Markit noted that companies remain “cautious” and the Bank of England has forecast only a gradual recovery through 2013. A separate report showed euro-area manufacturing continued to shrink last month.

“The sector found some stability at the very end of 2012,” said Samuel Tombs, an economist at Capital Economics Ltd. in London. Still, “with the recession in the euro zone set to deepen and consumers at home on course to be hit by a further bout of relatively high inflation, 2013 is shaping up to be another tough year for U.K. manufacturers.”

Today’s report showed that U.K. factory output increased for a second month, with growth accelerating to a 20-month high. The improved performance was mainly due to an improvement in domestic demand, with the sharpest gains in consumer and partly finished goods. Still, Markit said the increase in the index in December “does little to change the view that the sector contracted over the fourth quarter as a whole.”

Euro Area

In the euro area, a report from Markit showed manufacturing output contracted more than initially estimated in December, adding to signs a recession may extend into this year. A gauge fell to 46.1 from 46.2 in November, below an initial estimate of 46.3 on Dec. 14. Indexes for Germany, France and Italy all remained below 50 last month, the threshold that indicates growth.

In the euro region, the sector “is still stranded well into recessionary territory,” said Howard Archer, an economist at Global Insight IHS in London. “Any significant recovery in manufacturing activity still looks some way off.”

European stocks rose today, extending last year’s 13 percent global rally, after U.S. lawmakers passed a bill that averted spending cuts and tax increases threatening a recovery in the world’s biggest economy. The Stoxx Europe 600 Index jumped 1.9 percent as of 12:57 p.m. in London.

10-Year Gilt

U.K. government bonds declined as the U.S. deal reduced demand for fixed-income assets as a haven. The 10-year gilt yield rose 13 basis points to 1.95 percent, while the pound appreciated 0.3 percent to $1.6302, after reaching $1.6381, the strongest level since Aug. 30, 2011.

Manufacturing in the U.S. probably returned to growth in December, economists said before a report today. The Institute for Supply Management’s factory index rose to 50.4 from 49.5, which was the lowest since July 2009, according to the median forecast of 68 economists surveyed by Bloomberg.

Britain’s recovery has yet to gain traction amid the government’s budget cuts and a squeeze on credit. Data on Dec. 21 showed Britain’s economy emerged from a recession in the third quarter with slower growth than previously estimated. Today’s Markit report showed that output-price inflation accelerated the fastest in eight months and that companies continued to cut jobs in December, albeit at a slower pace.

‘Cost-Cutting Mode’

“There are increasing signs of firms starting to move out of this cost-cutting mode, though it is clear that the outlook remains far from certain,” Markit economist Rob Dobson said. “Business confidence among producers therefore remains fragile and could easily be derailed.”

In Asia, Singapore’s economy expanded more than economists estimated last quarter, averting a recession. Gross domestic product rose an annualized 1.8 percent in the three months to Dec. 31 from the previous period, when it contracted a revised 6.3 percent. The median of 11 estimates in a Bloomberg survey was for a 1.6 percent expansion.

The World Bank last month raised its outlook for emerging East Asia nations, citing China’s recovery, even as the export-dependent region faces risks from Europe. A Chinese factory gauge yesterday showed a third month of expansion. The Purchasing Managers’ Index was at 50.6 in December, unchanged from the previous month, the National Bureau of Statistics and China Federation of Logistics and Purchasing said. A separate index from HSBC and Markit on Dec. 31 rose to a 19-month high.

“There are signs that global trade flows are stabilizing as China and the U.S. strengthen and the downturn in the euro zone eases,” Markit’s Dobson said. “If the recovery in overseas markets continues to build at the start of 2013, this would be of major benefit to U.K. exporters.”

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