U.K. Manufacturing Shrinks Most in a Decade in July

By Svenja O'Donnell

Aug. 1 (Bloomberg) -- U.K. manufacturing contracted by the most in a decade in July and prices charged by factories rose at the fastest pace since at least 1999, worsening the Bank of England's dilemma as it tries to avert a recession.

The Chartered Institute of Purchasing and Supply's index of manufacturing dropped to 44.3, the lowest since December 1998, from 45.9 in June. Economists expected 45.5, the median of 27 forecasts in a Bloomberg News survey showed. Readings below 50 signal contraction.

The slump in manufacturing is deepening after reports this week showed that U.K. house prices dropped the most since 1991 in July and consumer confidence declined to a record low. At the same time, some central bank policy makers argue it may be necessary to raise interest rates to combat faster inflation.

``Recession, here we come,'' said Alan Clarke, an economist at BNP Paribas SA in London. ``The Bank of England's dilemma isn't changing but the extremes are fanning out and getting much worse.''

A subindex measuring prices for goods charged by factories rose to 63.1 from 62.6, the highest since that series started in November 1999. A gauge of input prices increased to 82.4, the most since records started in 1992, from 82.1. The CIPS report is based on a survey of more than 600 manufacturers.

The pound was little changed after the figures and traded at $1.9783 against the dollar at 12:25 p.m. in London. A separate report today showed corporate insolvencies increased 11.6 percent in the second quarter from the previous three months.

Earnings

Slower growth in the U.K. and around the world is starting to hurt companies' earnings. Tomkins Plc, the U.K. maker of auto parts and building materials founded in 1925, said yesterday first-half profit slumped. CSR Plc, the U.K. maker of microchips used in Nokia Oyj mobile phones, said July 29 that fewer sales of headsets and non-cellular products is eroding profit.

While manufacturing accounts for 15 percent of the economy, business services and finance make up 28 percent of gross domestic product.

Weaker growth is eroding support for Prime Minister Gordon Brown. A YouGov Plc poll published by the Daily Telegraph newspaper today showed only 15 percent of Britons say he is up to the job. He may also be losing the support of some lawmakers amid speculation that Foreign Secretary David Miliband is plotting to oust him.

The manufacturing slump is hurting the economy just as faster inflation prevents the Bank of England from cutting rates.

Consumer-price inflation reached 3.8 percent in June, the fastest pace in at least 11 years, and the central bank kept its benchmark rate at 5 percent this month. Policy makers will meet again next week and will probably keep the rate unchanged for a fourth month, according to all 30 economists in a Bloomberg News survey.

Some policy makers may still vote for a rate increase. Timothy Besley, one of the Bank of England's nine rate setters, said in an interview with the Daily Telegraph this week that ``more activism in policy now means one can afford to be less active later.''

To contact the reporter on this story: Svenja O'Donnell in London at sodonnell@bloomberg.net.