Factory slump shows no quick end to recession

The grim news supports the view that the Bank of England will add further stimulus once its current 50 billion pound plan to buy government bonds with newly created cash ends in November. It even triggered speculation the central bank could step up its programme when its August policy meeting ends on Thursday reports UK Reuters.

Britain fell into its second recession in four years around the turn of the year, and the economy contracted by a further 0.7 per cent from April to June due to government spending cuts, euro zone turmoil, bad weather and an extra public holiday.

Many economists have been betting that some of the output lost will be recovered in the third quarter, but the Markit/CIPS Manufacturing Purchasing Managers’ Index’s (PMI) drop to 45.4 from 48.4 in June raises the risk of another contraction.

It was the lowest reading since May 2009, further off the 50 mark that separates contraction from growth, and well below even the most pessimistic economist’s forecast in a Reuters poll.

The weak survey sent sterling to a two-week low against the euro and supported gilts which outperformed their German equivalent.

“Pretty terrible, surprisingly bad,” Tom Vosa, an economist at National Australia Bank, said about the PMI. “Ultimately, this puts more pressure on the Bank to cut Bank Rate, and certainly the government now has to hope that its Funding for Lending Scheme really comes good,” he said.

“But of course, if you are a lender in the UK and you are looking at this economy, why would you necessarily want to extend credit?,” he said.