UK manufacturing jump adds to recovery hopes

Reuters
A fork lift truck operator drives through the storage area at the Wienerberger Brick Factory in Dosthill
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A fork lift truck operator drives through the storage area at the Wienerberger Brick Factory in Dosthill, central England August 8, 2013. REUTERS/Darren Staples

By William Schomberg

LONDON (Reuters) - Britain's economic recovery got another boost on Monday when a survey showed manufacturing grew much faster than expected, adding to a run of data that questions the Bank of England's cautious outlook on growth.

The Markit/CIPS Manufacturing Purchasing Managers' Index (PMI) jumped to 57.2 last month from 54.8 in July, its fifth straight month of expansion and a two-and-a-half-year high.

The reading beat by a wide margin even the most optimistic forecast in a Reuters poll of economists. New orders and output rose at their fastest pace in nearly 20 years.

Sterling hit a two-month high against the euro while British government bond yields soared to two-year highs.

The survey, while welcome for Britain's policymakers after a long economic stagnation, makes for mixed reading for central bank chief Mark Carney.

He has stressed the economy needs a lot more help from the central bank's record-low interest rates before it is back to health but is struggling to convince financial investors that he will be able to keep rates low for long. They have pushed up some market interest rates as a result.

Rob Wood, an economist at Berenberg bank in London, said the economy seemed to be moving quicker than the BoE's forecasts made just a month ago, which could make it harder for the bank to repeat its warning to financial markets that they are pricing in an interest rate hike too soon.

"Still, for us the big picture is that the Bank under Mark Carney's leadership will err on the side of waiting too long before raising rates," Wood wrote in an email to clients.

Last month the Bank said it would keep interest rates at a record 0.5 percent until unemployment falls to 7 percent, something the bank only expects in late 2016.

Many investors expect joblessness to fall faster, though the PMI showed that employment growth in British factories slowed slightly in August after firms squeezed more from their workers.

But there were signs of inflation pressure as rising raw material costs - elevated by a spike in oil prices in August - pushed up prices paid by manufacturers. Input prices rose at the fastest rate for two years. Prices charged by factories rose much less quickly.

The Bank has said it may raise interest rates if inflation looks likely to exceed 2.5 percent in 18-24 months' time.

WELCOME SIGNS

The bank holds its September policy meeting this week and, whatever the market headaches, is likely to welcome signs that the recovery is broadening from an earlier reliance on credit-driven consumption and housing.

Rob Dobson, senior economist at Markit, said the survey suggested British gross domestic product could easily grow more than 1 percent between July and September, picking up speed from 0.7 percent in the second quarter of the year.

In another positive sign, lending by banks and building societies taking part in the Bank of England's Funding for Lending Scheme turned positive in the second quarter after shrinking in the first three months of the year.

August's expansion in Britain's manufacturing sector was driven by the fastest rise in both new orders and output since 1994. The sub-index for new orders leapt to 61.8 in August from 58.6 in July, boosted mostly by domestic demand.

Growth in export orders hit its highest level in more than two years, helped by signs of recovery in Britain's main export markets in the euro zone. Factory activity in the 17-nation bloc rose at its fastest pace in over two years in August, a separate survey showed on Monday.

Manufacturing accounts for about one-tenth of British GDP.

A separate survey published on Monday showed manufacturers were planning the fastest increase in capital investment in the year ahead since before the financial crisis, also suggesting the economy could be heading for a more balanced recovery.

(This story is corrected in second paragraph and 1st bullet point to show index highest in 2-1/2 years)

(Writing by William Schomberg; editing by Patrick Graham)

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