U.K. Manufacturing Data Shows Economy Stagnating, Not Recovering

By Bob Blandeburgo
Associate Editor
Money Morning

Manufacturing in the United Kingdom took an unexpected turn for the worse in May.

According to the Office for National Statistics, factory output fell by 0.5% from April to May, below forecasts for growth of 0.2%. Additionally, April's 0.2% reported rise in manufacturing was revised to zero. Total production in the United Kingdom, including energy production, dropped 0.6% in May following a downwardly revised 0.2% decline in the prior month.

Dragging down the output in particular was the a 2% decline in paper, printing and publishing as well as a 1.7% drop in machinery and equipment production.

Britain's economy, which the National Institute of Economic and Social Research (NIESR) estimated had hit its low point in March, will likely show an additional 0.4% drop in the second quarter according to a revised estimate. The revision dashed expectations that the British economy would rebound in the quarter.

"Revisions to the official estimates of economic growth in the first quarter of 2009 suggest that March can no longer be considered the trough of the recession," said NIESR Director Martin Weale. "However, on the basis of the monthly profile we estimate that the UK economy is now stagnating rather than continuing to contract at a sharp pace."

"Maybe we were getting a bit optimistic," Societe Generale SA (OTC ADR: SCGLY) economist Brian Hilliard told Reuters.

The news fueled speculation that Bank of England (BOE) policymakers will vote to expand their 125 billion pound infusion of money supply to 150 billion pounds at the central bank's monthly meeting tomorrow (Thursday).  However, More than half of the economists surveyed by Bloomberg News expect the BOE to hold at its current 125 billion pound asset purchase. The BOE is expected to keep the interest rate at 0.5%.

England's economy shrank 2.4% in the first quarter, largely due to a decline in the manufacturing and construction sectors.

While the United Kingdom's manufacturing output decline is similar to that of the world's larger economies, there are a few nations where the output is growing.

Last week, it was revealed that China's Purchasing Managers Index (PMI), a key measure of manufacturing activity, grew to 53.2 in June from 53.1 in May. Neighboring India's PMI dropped slightly to 55.3 in June from 55.7 in May, but is still well above the expansion/contraction threshold of 50.

In the United States and Japan, the world's No. 1 and No. 2 economies, manufacturing is still contracting.  The manufacturing index in the United States inched closer to the growth threshold, with the PMI rising to 44.8 in June from May's 42.8. Japan's contraction in manufacturing is also showing signs of slowing, with its June PMI rising to 48.2.

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