June 12, 2012 / 3:13 PM / 5 years ago

Longer UK slump looms as manufacturing falters

4 Min Read

Staff work on the Jaguar XJ production line at their Castle Bromwich Assembly Plant in Birmingham November 29, 2011.Eddie Keogh

LONDON (Reuters) - British manufacturing output posted an unexpected fall in April, raising the risk of a longer recession and turning up pressure on policymakers to take action to boost economic growth.

The Bank of England shied away from injecting more cash into the struggling economy last week, but on Monday central banker Adam Posen called for further purchases of assets, focusing on loans to small and medium-sized companies.

Britain is still suffering from a slump that followed the 2007-2009 financial crisis and slipped back into recession around the turn of the year. With the euro zone crisis hitting exports and making companies reluctant to invest and hire, economists fear another quarter of contraction.

The National Institute of Economic Research, a leading think-tank, estimates the economy eked out 0.1 percent growth in the three months ending in May, but an extra public holiday in June could wipe out any slight increase in quarterly output.

Manufacturing output dropped 0.7 percent in April after a 0.9 percent rise in March, the Office for National Statistics said on Tuesday, disappointing hopes for an unchanged reading.

The wider reading of industrial output, which includes energy production and mining, was unchanged in April after a 0.3 percent drop in March, but also below forecasts.

"Given that the euro zone crisis has intensified since April and recent manufacturing surveys have been very weak, it seems likely that the industrial sector will remain a drag on overall GDP growth for some time to come," said Samuel Tombs, economist at Capital Economics.

Adding to a gloomy picture, the outlook for the British housing market worsened as the euro zone crisis deepened and sales took a temporary hit from the expiry of a tax holiday, while growth in permanent job placements slowed in May and employers said they expected to take on fewer new staff in the months ahead.

In another reminder of how closely Britain's economic fortunes are linked with those of continental Europe, the Society of Motor Manufacturers and Car Traders said the country could produce a record 2 million vehicles in 2015 provided demand from the euro zone held up.

Cold April

Finance minister George Osborne warned on Sunday the crisis in the euro zone was killing off the recovery in Britain, and even members of his own Conservative party have called on him to take stronger action to boost growth.

But Osborne's hands are tied by his pledge to erase the country's huge budget deficit, which is still around 8 percent of GDP, although the coalition government has promised to come up with further steps to unlock infrastructure spending.

Hopes of an early end to the recession had already been dented by a PMI survey showing the manufacturing sector shrank at its fastest pace in three years in May as orders nosedived.

The surprise drop had triggered speculation the central bank would restart its asset purchases, but the BoE held back as concerns over high inflation outweighed growth worries.

"The thing the BoE can do something about is the weak underlying manufacturing activity," said Alan Clarke, economist at Scotiabank.

"That was worryingly weak even before the manufacturing PMI fell off a cliff," he said. "We should brace for a bit more weakness in the months ahead."

Industrial output was dragged down in April by a drop in the manufacturing of basic pharmaceutical products and preparations, as well as in the category of other manufacturing and repair.

A 13.6 percent monthly jump in electricity and gas output during the coldest April since 1989 was offset by a 6.4 percent fall in oil and gas extraction as a North Sea platform was closed after a gas leak.

Additional reporting by Fiona Shaikh; Editing by Catherine Evans

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