UK manufacturing in Feb the worst in almost 3 yrs

[LONDON] UK manufacturing grew the least in almost three years in February and new orders barely rose, highlighting the fragility of the economy as it heads into an uncertain year.

Markit Economics said its factory index dropped to 50.8 from 52.9, marking the weakest reading since April 2013. A gauge of new orders was just above the key 50 line that divides expansion from contraction while employment shrank for a second month.

The monthly Purchasing Managers Index will raise questions about the sustainability of the economic expansion as export demand falters in mainland Europe and some emerging markets. Uncertainty related to Britain's referendum on its European Union membership could further undermine the outlook.

"The breadth of the slowdown is especially worrisome," said Rob Dobson, a senior economist at Markit. "The domestic market is showing signs of weakening while export business continued to fall." The pound pared gains against the dollar and was trading at US$1.3954 at 9.51am London time, up 0.3 per cent from Monday. It had increased as much as 0.5 per cent.

The report suggests manufacturing output will be "fairly flat" in the first quarter, said Scott Bowman, an economist at Capital Economics Ltd. in London. "The effect that the EU referendum vote has on the exchange rate and demand from Europe adds to the uncertainties facing the sector." Price pressures "remained firmly on the downside," with costs and output prices both falling, Markit said. While much of this is due to commodity prices, there are also signs that weaker growth may be to blame as it increases competition between manufacturers to secure new business.

Mr Dobson said the recent sharp drop in sterling - which may lift inflation - happened late in the survey period and isn't fully reflected in the results.

He also said the PMI "provides further cover for the Bank of England's increasingly dovish stance." Speaking at the Group of 20 meeting in Shanghai last weekend, Bank of England Governor Mark Carney reiterated that the conditions are not in place for a rate increase. He told CCTV that he wants to see stronger economic growth and unit- labor costs before considering lifting the benchmark from a record low 0.5 percent.

BLOOMBERG