Economy stagnant, warns BCC as recovery doubts return

Activity in the UK’s largest industry fell for a third month running as the eurozone crisis continued to take a toll on manufactured export orders, according to September’s Purchasing Managers’ Index (PMI). Output dropped from a reading of 49.6 in August to a worse-than-expected 48.4, where anything below 50 indicates contraction, and companies began laying off staff in larger numbers, reports The Telegraph.

Separate figures from the Bank of England for the first full month of its Funding for Lending Scheme (FLS), which was designed to reduce borrowing costs and increase lending, showed that households repaid £276m of mortgage debt and cleared another £134m of personal loans. Lending to businesses dropped by £2.2bn – the largest monthly decline since February.

In its quarterly economic survey, the BCC predicted the economy had come out of recession in the three months to September, growing at 0.5pc, but that business confidence was falling and orders declining. John Longworth, BCC director general, said: “Economic growth is weak and businesses are less confident and less likely to invest than they were at the beginning of the year.”

The BCC’s finding chimed with the manufacturing PMI. The surprise fall in output was largely a result of the sixth straight month of declining new export orders, down from 48.8 to 48, which the survey’s compilers Markit and the Chartered Institute of Purchasing & Supply put down to “weaker demand from within the European Union and Asia”.

There was also bad news on margins and jobs. The employment balance fell from 49.8 to 47.0, indicating manufacturers have accelerated the pace of job cutting. At the same time, input prices rose from 48.8 to 57.5 in September while output prices dropped from 51.3 to 50.9, suggesting “firms have struggled to pass on the increase in their costs to customers”, Capital Economics’ Samuel Tombs said.

However, there were signs that domestic orders are picking up, as new orders rose from 50.2 to 50.6 – its highest level since January – pointing to some resilience in the domestic economy.

The Bank’s lending data also sparked concerns as, on top of falling borrowing levels, the average fixed mortgage rate rose by 0.03 percentage points in August and is now 0.52 percentage points higher than at the start of the year. Michael Saunders, UK economist at Citi, said: “The data suggest that the introduction of the FLS has not produced significant immediate results in improving the growth or price of credit to households and businesses.”

Economists said it was far too early to judge the scheme but they did point to the reduction in banks’ funding costs since the plan was unveiled in June, which should feed through to lower rates. A Bank spokesman said: “Early indications suggest the FLS is having an impact, but it is unrealistic to expect to see that in lending figures for August.”

However, Monday’s data suggested there was little demand for credit, which would limit the its economic impact. August was the second month running that consumers repaid personal debt, and the net mortgage repayment was the largest since December 2010.
“The Bank data indicate that consumers appetite for new taking on new borrowing is limited while there is also an ongoing strong desire of many consumers to reduce their debt,” Howard Archer, IHS Global Insight UK economist, said.