UK manufacturing activity contracts at fastest pace in over three years

British manufacturing shrank at its fastest pace in more than three years in July, a survey showed on Monday, adding to signs that the country’s vote to leave the European Union is hurting growth.

The data could give the Bank of England (BoE) more impetus to cut interest rates on August 4, after it surprised markets by holding fire in July but said most of its policymakers were leaning towards stimulus in August.

The Markit/CIPS UK manufacturing purchasing managers’ index (PMI) fell to 48.2 in July from 52.4 in June, its lowest since February 2013 and below an initial “flash” reading reported in late July of 49.1.

Measures of output and new orders fell below the 50 mark that denotes growth for the first time since early 2013 due to weaker market conditions at home and uncertainty related to the EU referendum.

The output index fell to 47.8 in July from 53.6 in June, its lowest since October 2012, while new orders – which grew robustly in June – suffered their sharpest turnaround since 1998 and fell at their fastest rate in over three years.

“The weakening order book trend and upswing in cost inflation point to further near-term pain for manufacturers,” said Rob Dobson, a senior economist at Markit, which compiles the survey.

“On that score, the weak numbers provide powerful arguments for swift policy action to avert the downturn becoming more embedded.”

All but three of 49 economists polled expect the BoE to cut interest rates by at least 25 basis points on August 4, but economists were divided on whether the Bank would restart its bond-buying programme.

The BoE will have to be careful to balance any hit to growth with rising price pressures, which were already evident in the PMI manufacturing survey.

Average purchase prices rose at their fastest pace in five years, with companies citing higher commodity prices and higher import prices, the latter resulting from the weaker currency. Sterling fell to a 31-year low against the US dollar after the Brexit vote but has recovered some of that ground since.

Output price inflation was also the highest in nearly two years.

But the boost to exports from a weaker pound was less marked than previously estimated, Mr Dobson said. A measure of new export orders slowed in July after hitting a seven-month high in June.

The PMI numbers were broadly in keeping with official data suggesting industrial production slowed towards the end of the second quarter after a strong April.

Data covering the post-Brexit period has been scarce so far. But there are signs consumer confidence is struggling, while Markit said its earlier one-off “flash” PMI surveys were consistent with the economy shrinking by a quarterly 0.4 per cent if they persisted.

British finance minister Philip Hammond downplayed the flash PMI numbers saying they were a measure of sentiment and not of “hard activity”.

But the numbers were enough to sway BoE policymaker Martin Weale, who more recently had been on the hawkish side of the rate-setting committee, to view the economic outlook “rather differently” he said.

The PMI manufacturing survey is based on responses from purchasing executives at over 600 companies to questions on whether business conditions improved, deteriorated or stayed the same compared with the previous month.

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