U.K. Manufacturing Growth Cools as Export Demand Decreases

U.K. manufacturing grew less than economists forecast in March as export demand fell to its weakest level in 10 months.

A Purchasing Managers’ Index declined to 55.3, the lowest since July, from a revised 56.2 in February, Markit Economics said in a statement in London today. The median estimate of 34 economists in a Bloomberg News survey was for a reading of 56.7. A level above 50 indicates expansion.

While a recovery is under way, Bank of England Governor Mark Carney has said investment and overseas sales need to pick up to generate sustainable growth. Britain’s economic expansion of 1.7 percent last year, the strongest since 2010, was largely powered by consumers, and BOE officials say improving business confidence indicates the recovery will broaden this year.

“The old criticisms still apply, with the survey signalling a downturn in export growth and an expansion that is all-too reliant on domestic consumers,” said Rob Dobson, senior economist at Markit in London. BOE policy makers will “read this combination of slower but sustained output growth and muted price trends at manufacturers as in line with maintaining their current monetary-policy stance,” he said.

The pound fell against the dollar after the report and was trading at $1.6652 as of 9:44 a.m. London time, down 0.1 percent from yesterday.

Euro-Area Manufacturing

In a separate release, Markit said an index of euro-area manufacturing slipped to 53 in March from 53.2 in February, unchanged from a flash estimate. The average reading for the currency bloc for the first quarter was 53.4, the highest since the second quarter of 2011, it said.

In the U.K., growth in new factory orders eased in March, with investment-goods orders slowing “sharply,” Markit said. An index of export orders dropped to 52.8 from 54.6, the lowest since May, reflecting weaker demand in the Asia-Pacific region.

BOE policy makers have pledged to keep the key interest rate at a record-low 0.5 percent at least until unemployment, now at 7.2 percent, falls to 7 percent. They also have said that when tightening begins, increases in borrowing costs will be “gradual” and “limited.” Today’s report showed that factory payrolls rose in March at a similar pace to February.

Factory-gate prices increased, though the rate of growth eased to a seven-month low. Markit said this was due to manufacturers responding to “strong price competition and lower purchasing costs.”

Sterling reached the highest level since November 2009 versus the dollar in February. BOE officials said on March 19 the pound’s advance had led to a tightening of financial conditions and the currency may appreciate further as the economy strengthens.

While U.K. manufacturing “may have lost some steam over the first quarter, this seems unlikely to herald the beginning of a renewed slowdown,” London-based Capital Economics Ltd. economists Paul Hollingsworth and Samuel Tombs said in a note. “A sharp fall in the export orders balance suggests that the strong pound may finally be starting to hurt exporters.”

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