June 3, 2013 / 10:29 AM / 4 years ago

British manufacturing registers two-month expansion

A worker brazes a component at manufacturing firm Sigma UK in Hinckley, central England, May 1, 2013. REUTERS/Darren Staples

LONDON, June 3 (Reuters - A strong rise in new orders helped British manufacturing grow at its fastest pace in over a year last month, a survey showed on Monday, and revised data for April meant UK factories have now had a two-month expansion.

Weak lending data from the Bank of England, however, highlighted the ongoing challenges facing the economy.

Banks and building societies taking advantage of the Bank’s Funding for Lending Scheme cut lending by 300 million pounds ($455 million) in the first three months of the year, leaving the central bank hoping for a pick-up later in 2013.

But economists said the strong manufacturing data made it increasingly unlikely that policymakers would return to their previous approach of large-scale bond purchases, either at BoE Governor Mervyn King’s last rate-setting meeting this week or once Mark Carney succeeds him on July 1.

The Markit/CIPS Purchasing Managers’ Index rose to a 14-month high of 51.3 in May, and April’s figure was revised up to above the 50-mark that divides growth from contraction.

“This reduces the likelihood of more quantitative easing, at least in the immediate term. I think this is part of a positive trend,” said George Buckley, UK economist at Deutsche Bank.

Factory output contracted 0.3 percent in the first three months of 2013 and has been a drag on growth for much of the past year, but May’s figures offered a positive outlook, with orders rising at their fastest pace in more than two years.

“Signs that the manufacturing sector is recovering will add further weight to the Bank of England’s decision to wait and see before adding to its accommodative policy stance,” said Markit economist Rob Dobson.

The Bank of England is widely expected to refrain from action at its June policy meeting on Thursday, and a Reuters poll last week showed that economists believed the chance of more asset purchases this year had fallen below 50 percent.

Britain’s economy grew by 0.3 percent in the first three months of 2013 - stronger than most economists expected - but the recovery is fragile and there is an ongoing political debate about how far it is hampered by government austerity measures.

In a speech hosted by Thomson Reuters earlier on Monday, the opposition Labour Party’s finance spokesman, Ed Balls, said it would have to cut some welfare benefits if it returns to power after an election in 2015.

LACKLUSTRE LENDING

The central bank bought large sums of government bonds between March 2009 and October 2012, but has more recently focused on measures such as the Funding for Lending Scheme to boost the flow of credit to households and businesses.

However, figures on Monday showed that banks and building societies taking part in the scheme had reduced lending by some 1.79 billion pounds since July last year, despite drawing down 16.45 billion pounds from the scheme.

The figures are broadly consistent with Friday’s BoE data for the banking sector as a whole in April.

Most of the fall in lending is due to three of the country’s largest lenders - Santander (SAN.MC) and state-controlled Royal Bank of Scotland (RBS.L) and Lloyds Banking Group (LLOY.L) - cutting net lending by billions of pounds as they run down excessive loans made before the financial crisis.

Barclays (BARC.L) and the mutually-owned Nationwide Building Society increased lending by the most.

Last month the FLS was changed to give banks a greater incentive to lend to small businesses, and Paul Fisher, the BoE policymaker in charge of the scheme, said he expected the situation to improve later in the year.

“The plans of the FLS participants suggest that net lending volumes will pick up gradually through the remainder of 2013,” he said.

Additional reporting by Dasha Afanasieva and Sarah Young Editing by Jeremy Gaunt.

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