Manufacturing shrinking slows

Britain's manufacturing sector shrank for the third month running in June but at a slower rate than expected, a report showed today.

The purchasing managers' index (PMI) from the Chartered Institute of Purchasing and Supply rose to 49.6 in June from a revised 47 in May. A reading of 50 or above signals expansion, while below 50 indicates contraction.

June's reading beat analysts' forecasts of 48, but came in behind the eurozone PMI which rose to 49.9.

While UK manufacturing as a whole remained in the doldrums, there were some encouraging signs. New orders rose for the first time in three months in June. Although the rate of growth was only slight, this was a marked improvement compared to May, when new business fell at the fastest rate for three-and-a-half years.

New export orders also rose for the first time in six months in June, reflecting an increase in new business from North America and the EU.

"A rare piece of better than expected news on the manufacturing sector, with orders growing for the first time in three months as foreign demand improved," said Howard Archer, UK economist for the consultancy Global Insight. "Nevertheless, the manufacturing sector is clearly still struggling and the case for an interest rate cut in August is now very strong."

Yesterday the Office for National Statistics revised its first quarter growth numbers downward, amid a series of weak retail sales figures and a marked slowdown in house price inflation.

The Bank of England has held rates at 4.75% for 10 months in a row, but the City is anticipating a quarter-point cut in the next few months, especially if the consumer slowdown persists.

"It is clear across the eurozone that there was a rebound but the rebound in the UK is surprising," Peter Dixon, economist with Commerzbank, told Reuters.

"UK manufacturing is still contracting, but, on the other side, it is not as bad as some of the other data we have seen recently. It did not get worse. The Bank of England will have to cut rates eventually, but this could give them a little space to breathe."