Britain and Europe share bleak economic outlook as report shows manufacturing dropping at biggest rate for three years

This article is more than 8 years old

This article is more than 8 years old

Britain and the rest of Europe are heading for a deeper recession after figures showed manufacturing output slumped at its fastest pace for three years.

A dearth of new orders in the UK has added to a sense of panic among manufacturers, which have been left scrambling to keep their factories busy and delay laying off workers, according to a report into the industry.

Analysts blamed the weakness of the UK market along with the deteriorating crisis in the eurozone for the fall in sales and depleted order books. They said the Bank of England could restart its programme of printing electronic money as early as next week to boost the supply of credit to small- and medium-size businesses.

The governor of the Bank, Sir Mervyn King, has said the door remains open to more quantitative easing even though only one member of the nine-strong monetary policy committee voted to increase the current £325bn total at its last meeting.

The Markit/CIPS manufacturing purchasing managers' index (PMI) for May found activity fell to 45.9 from a downwardly revised 50.2 in April, its lowest reading since May 2009 and the second steepest fall in the survey's 20-year history.

Analysts had expected a more modest dip below the 50-point mark that separates contraction from expansion, to 49.8.

The miserable picture in the UK was reflected across Europe with a manufacturing slump that has already undermined the recoveries in the southern half of the continent also becoming entrenched in the north.

The eurozone's manufacturing sector PMI dropped to 45.1 from 45.9 in April.

Chris Williamson, chief economist at Markit, said: "The data indicates that the sector is contracting at a quarterly rate of around 1%, suggesting that manufacturing will act as a major drag on economic growth in the second quarter.

"All four of the largest eurozone nations are now reporting worryingly sharp downturns in their manufacturing sectors."

Germany

A downturn in Germany's export bonanza to the far east triggered a slump to 45.2 in its manufacturing PMI. New orders fell, especially from abroad, forcing the sharpest slowdown since June 2009. The price of raw materials also declined, but not enough to stop firms shedding workers.

France

The French manufacturing PMI worsened in May to 44.7 after registering 46.9 in April. New orders fell at the sharpest rate since April 2009. Jobs and investment were top of the list of business cuts.

Spain

Spain's manufacturing sector contracted to the lowest level since May 2009. The decrease from 43.5 in April to 42.0 was blamed on poor domestic and eurozone demand.

Italy

A lack of domestic demand meant Italy's manufacturing PMI continued its long slump last month, though at a slightly slower pace after a rise to 44.8 from 43.8 in April.

Greece

The Greek PMI index rose to an eight-month high but still remained the lowest in the eurozone at 43.1. In April, it reached 40.7.

Ireland

Dublin's export boom continued after a moderate expansion in manufacturing activity to 51.2, from 50.1 in April. The major driver was new orders, which increased for the fourth month in a row and pushed up employment for a third month.

Without a clear plan from Brussels, Paris and Berlin over how to exit the crisis, manufacturers are expected to continue cutting orders and jobs over the coming months.

Vicky Redwood, chief UK economist at Capital Economics, said the Bank of England was poised to respond, should the UK's situation worsen: "Since May's meeting, the case for providing more stimulus has strengthened. Most importantly, the eurozone crisis has intensified. While sentiment towards Greece has improved a touch, concerns about the Spanish banking system have grown."

The chancellor, George Osborne, has indicated that a series of infrastructure projects will get the green light later in the summer as the Treasury looks to haul the country out of its recession. However, the projects are expected to be low-key and unlikely to have a major impact on growth.

Markit economist Rob Dobson said the weakness of UK manufacturing was in large part due to domestic demand.

"This month's drop is not simply linked to the ongoing crisis of the eurozone, but to increasing weakness of the UK domestic market," he said."Manufacturers are also struggling to replace orders from Europe with demand from elsewhere, with reports of slower new work inflows from the United States and Asia."

In a further sign of the darkening economic outlook, the British Chambers of Commerce this week cut its 2012 GDP growth forecast to 0.1% from 0.6%.

More than a third of companies surveyed by Markit reported lower new orders in May, with its index falling by seven points to 42.0 – its lowest since Britain was in recession in the immediate aftermath of the 2008 financial crisis.

The decline reflected a sharp weakening in domestic orders, though export orders were also subdued, falling for a second month running in May.