UK Manufacturing Falls To 3-Year Low
Danske Markets | Jun 01, 2012 02:32AM ET
British manufacturing activity in May fell at its fastest pace since November 2008. The PMI index fell to 45.9, from a downward revised 50.2 in April. This is the lowest level in three years and substantially worse than the modest dip expected by forecasters. The new orders index fell to 42.0 – the lowest since the big recession in 2009.
Today’s numbers clearly illustrate that Britain is not isolated from the euro crisis. From being in much better shape than the average eurozone member, the UK now looks somewhat similar – in technical recession, with a bleak economic outlook, a high deficit and a growing debt burden. Investors who thought that the UK would be more resilient to the euro turmoil might think twice after this; UK data is likely to reflect the dire economic conditions in central Europe and British exporters are likely to find it harder to sell their goods if the pound keeps strengthening against a vulnerable euro.
Implications for monetary policy
Under normal circumstances, the Bank of England meeting next week should be a nonevent as the big meeting followed by the Inflation Report was last month. However, with the turmoil in the eurozone, the risk of a ‘Grexit’ and speculation about a euro break-up, one cannot exclude the Monetary Policy Committee trying to protect the UK economy and UK financials by undertaking more stimuli. When one combines this with today’s terrible data, the general darkened economic outlook and that inflation now stands at ‘only’ 3%, the probability of some pre-emptive easing is definitely present.
Bank of England (BoE) deputy governor Charles Bean said in an interview yesterday that the Bank ‘had scope to restart the asset purchase programme if things took a turn for the worse in Europe’. Adam Posen, the MPC’s arch-dove, could always vote for more easing together with David Miles, who last month preferred to lift the asset purchase target, and Paul Fischer, who has also expressed concerns about the economic outlook. Accordingly, Governor Mervyn King’s vote could become pivotal.
We think the BoE will keep the base rate unchanged at 0.5% and keep the asset purchase target unchanged at £325bn but we can imagine that the MPC is considering changing both. We have long called for more ‘real stimulus’, but we doubt that more Gilt purchases will do much good, as UK government bonds are already very popular among investors as ‘protection’ from the eurozone crisis.
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Our main scenario is that the BoE remains sidelined at the 7 June meeting and awaits developments. In our view, minutes from the meeting are likely to be quite dovish. EUR/GBP has not been able to make a firm break of 0.80 on the downside but we think it will happen as the turmoil in the eurozone is not going to disappear and we believe the ECB is likely to deliver a 25bp rate cut next week. We keep our one-month EUR/GBP forecast at 0.79 and see the pair trading around 0.78 in three months.
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