U.K. Factory Growth Quickens as Recovery Strengthens

U.K. manufacturing growth accelerated more than economists forecast in July, adding to evidence Britain’s recovery is gathering pace as the Bank of England voted to keep stimulus paused.

A factory gauge rose to 54.6 in July from 52.9 in June, the highest in 28 months, Markit Economics and the Chartered Institute of Purchasing and Supply said today in London. That’s above the 50 level indicating expansion. That momentum was echoed in the euro area, where survey manufacturing grew more than initially estimated, while China’s official factory index also showed expansion.

Signs of economic growth building in the U.K. and abroad will be welcome news to manufacturers, as demand for British goods increases at home and in the euro area, the country’s biggest trading partner. The Bank of England left stimulus unchanged today as it switches focus to forward guidance, and the European Central Bank kept its interest rate at a record-low 0.5 percent.

“The U.K. is picking up speed now,” said Rob Wood, an economist at Berenberg Bank in London and a former BOE official. “The manufacturing sector may finally be able to look forward to a period of sustained growth driven by rising domestic demand and improving exports.”

The pound slipped 0.1 percent against the dollar and was at $1.5194 as of 2:05 p.m. London time. It traded as low as $1.5135 earlier.

Euro Area

Markit’s factory gauge has increased in each of the past five months. Economists had forecast a manufacturing reading of 52.8, according to the median of 29 estimates in a Bloomberg News survey. The reading for June was revised higher to 52.9 from 52.5.

A euro-area factory index increased to 50.3 last month, topping the 50 mark for the first time since July 2011, a separate report by Markit showed today.

In China, an unexpected gain in the official manufacturing index suggested progress toward arresting an economic slowdown. China’s official factory gauge increased to 50.3 in July from 50.1 in June, while a measure from HSBC Holdings Plc and Markit fell to 47.7, an 11-month low. The increase in the official index suggested progress toward arresting a slowdown that has put the nation’s 7.5 percent growth target for 2013 in jeopardy.

By contrast, Russian manufacturing unexpectedly shrank in July, with the gauge at the lowest since December 2009.

In the U.K., building momentum in factory growth follows a 0.6 percent increase in gross domestic product in the second quarter after a 0.3 percent gain in the first three months. Unemployment claims fell the most in three years in June.

Production High

Markit said that growth in production and new orders was the highest since February 2011. New export business rose at the fastest pace for two years, reflecting increased sales to markets including Australia, China, the euro area and the U.S.

“The sector looks to be building on the foundation of the second quarter,” said Rob Dobson, senior economist at Markit in London. The BOE won’t change policy today, “preferring instead to wait and see if the broader economic recovery takes a firmer hold,” he said.

The Bank of England kept its target for bond holdings at 375 billion pounds ($570 billion) today, in line with the forecast of all but one of 42 economists in a Bloomberg News survey.

Increasing momentum in Britain’s economy is also helping boost confidence. An index by GfK NOP Ltd. this week showed consumer sentiment rose to the highest in more than three years last month.

Next Profit

Next Plc, the U.K.’s second-largest clothing retailer, this week increased the higher end of its full-year profit target by 10 million pounds to 675 million pounds as it sold more summer items at full price. Reckitt Benckiser Group Plc, the maker of Nurofen painkillers, said on July 29 that sales growth this year will be at the higher end of its forecast range.

With the economy showing signs of growth and the arrival of Mark Carney as its governor last month, the Bank of England is now shifting gear as it looks to adopt ways of steering policy expectations instead of providing direct stimulus. He will present the findings of a review on forward guidance methods next week after saying in July that changes in bets on future interest rates were “not warranted,” which helped lower 10-year gilt yields about 20 basis points from a June 24 high.