U.K. Manufacturing Contracts, Services Growth Stalls

By Brian Swint and Jennifer Ryan

Oct. 1 (Bloomberg) -- U.K. manufacturing contracted at the fastest pace in 16 years and service industries stagnated for the first time since 2002, suggesting the economy may have entered a recession.

The Chartered Institute of Purchasing and Supply's index of manufacturing, based on a survey of factories, fell to 41 in September from 45.3 the previous month, the lowest since the report began in January 1992. Growth in services from hotels to transportation stalled in the three months through July, the Office for National Statistics said today in London.

The global financial crisis forced Prime Minister Gordon Brown's government to seize mortgage lender Bradford & Bingley Plc this week, and prompted the Bank of England to offer emergency funds to money markets today. Economists at BNP Paribas and Morgan Stanley predict the central bank will cut the main interest rate on Oct. 9 for the first time since April.

``The weaker pound has made us more competitive but the demand isn't there, and services are following manufacturing down,'' said Alan Clarke, an economist at BNP Paribas. ``It does seal the case for a rate cut.''

The pound was little changed after the reports, trading at $1.7788 as of 1 p.m. in London. Against the euro, it traded at 79.16 pence.

Emergency Funds

The central bank auctioned $30 billion of one-week emergency funds today and drained 10 billion pounds ($17.8 billion) in pounds to help restore confidence to money markets. The bank has kept the benchmark rate at 5 percent for five months.

Measures for factory output, new orders and employment fell to the lowest since 1992, while an index of new export orders was at the lowest since September 2001, the CIPS report showed. Manufacturing makes up about 14 percent of the economy, compared with three-quarters for services. A reading below 50 in the CIPS index signals contraction.

The government seized Bradford & Bingley and helped to rescue HBOS Plc after the credit crisis led to a loss of investor confidence in both banks.

Lehman Brothers Holdings Inc., the securities firm that filed for bankruptcy two weeks ago, will eliminate 750 jobs in its European fixed-income and personal investment management units after talks to find a buyer failed. Financial firms worldwide have cut 130,000 positions as global credit markets collapsed.

Recession Forecast

Britain entered a recession in July, forecasts by the European Commission and the Confederation of British Industry, the country's biggest business lobby, show. Bank of England Governor Mervyn King said in August that economic output will be ``broadly flat'' for a few quarters.

Policy makers may reduce the benchmark interest rate in November, the median forecast of 52 economists in a Bloomberg survey show.

The bank has refused to cut borrowing costs since April while policy makers battle to control consumer prices. Inflation reached 4.7 percent in August, more than twice the 2 percent target.

Today's CIPS report suggests price pressures at manufacturers may be easing. A measure of input prices fell to 73.7 from 78.1, the biggest decline since 2005, while an index of prices charged to customers declined 1.9 points to 62.6.

Oil prices have dropped by almost a third since reaching a record in July, while the pound has declined 10 percent against the dollar. The pound has fallen 8 percent against the euro, the currency of the 15 countries which make up Britain's biggest trading partner.

``With these data and the recent extraordinary financial market turmoil, it now seems highly likely that the MPC will cut rates at the October meeting next week,'' Michael Saunders, chief western European economist at Citigroup Inc. in London, said in a note today.

To contact the reporters on this story: Brian Swint in London at bswint@bloomberg.net; Jennifer Ryan in London at Jryan13@bloomberg.net