U.K. Manufacturing Shrinks as Recession Slows Lending Growth

By Jennifer Ryan and Brian Swint

March 2 (Bloomberg) -- U.K. manufacturing shrank for a 10th month and consumer lending rose at the slowest pace since at least 1993, evidence Britain’s recession is intensifying.

An index based on a survey of factories fell to 34.7 in February from 35.8 the previous month, the Chartered Institute of Purchasing and Supply and Markit research said in a report today. Net consumer lending increased in January by 1.1 billion pounds ($1.6 billion), a 15-year low, the Bank of England said.

The government is pumping billions of pounds into banks as the British economy slides into the worst recession in at least three decades. The Bank of England will probably cut the benchmark interest rate this week to a record low of 0.5 percent and start adding money to the economy through so-called quantitative easing.

“We’re going to see a continued drag in manufacturing output, and there’s not enough credit going to the household sector,” said Peter Dixon, an economist at Commerzbank AG in London. “We see a half-point rate cut this week and probably an estimate of how much the bank will do in quantitative easing.”

Today’s manufacturing reading is the weakest since the index reached a 17-year low of 34.5 in November. A measure of employment and production contracted at the fastest rate in the survey’s history, CIPS and Markit said.

Job Cuts

GKN Plc, the U.K. maker of car parts and aircraft components, reported a full-year loss on Feb. 26 and said it will eliminate an additional 2,400 jobs this year.

Officials are taking new steps to shore up struggling industries and revive lending. The Bank of England is edging closer to providing support for carmakers’ British finance units, which would help them to lend to new-car buyers, Paul Everitt, chief executive officer of the Society of Motor Manufacturers & Traders, said in an interview on Feb. 24.

Prime Minister Gordon Brown’s government last week instructed Northern Rock, the nationalized mortgage lender, to expand lending by 14 billion pounds and is guaranteeing assets for Royal Bank of Scotland Group Plc to prevent its collapse.

Mortgage approvals were lower than the 33,000 median forecast of 24 forecasts in a Bloomberg News survey, Bank of England data showed.

Net lending secured on dwellings rose by 690 million pounds in January, compared with 1.8 billion pounds the previous month, the central bank said. Combined with net consumer credit of 403 million pounds, total net lending increased at the slowest pace since records began in April 1993.

Negative Loop

“There’s no sense yet that this downturn is bottoming out,” said Richard McGuire, an economist at Royal Bank of Canada in London. “Increasing unemployment will increase defaults and will start a negative feedback loop. We expect a half-point rate cut this week” from the current 1 percent.

The British economy contracted at the sharpest pace since 1980 in the fourth quarter and joblessness rose to a 10-year high in January. House prices dropped an annual 10 percent last month, mortgage lender Hometrack Ltd. said in London today.

The U.K. central bank will this week cut the benchmark interest rate by a half-point to the lowest since it was founded in 1694, according to the median of 60 economists’ forecasts.

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