Instant View - UK manufacturing shrinks in March, credit grows in February

LONDON (Reuters) - LONDON, April 2 (Reuters) - Britain's manufacturing sector shrank in March, according to a monthly survey by Markit.

Separate data from the Bank of England showed overall lending to consumers grew although the number of mortgage approvals fell.


- The Markit/CIPS manufacturing purchasing managers' index came in at 48.3, only slightly above February's shock reading of 47.9, and a touch weaker than the consensus forecast.

- The output component of the survey fell in March at its fastest pace since October.

- Consumer credit rose by a net 0.6 billion pounds in February, higher than a 0.5 billion-pound increase in January.

- Mortgage lending grew by 0.9 billion pounds in February, stronger than January's growth of 0.3 billion pounds.

- Mortgage approvals numbered 51,653 in February, the lowest since September and down from 54,187 in January.



"It's broadly as expected. The real consensus would have been a bit lower after the sharp fall in the U.S. ISM so it's a little bit of a relief after that. The underlying picture is pretty similar to Q4 if you look at the quarterly average, there's maybe a modest improvement being signalled relative to the middle of last year, but nothing dramatic.

"If you look at all of the data we have for Q1 I think we could just about squeeze some positive growth out of it. But it's going to be quite modest - 0.1 percent, at best 0.2 percent for GDP. It looks like we've just about avoided the triple dip, but that has more to do with the services numbers we had last week rather than this PMI report.


"That was a bit weaker than expected but... we don't expect to see any underlying pick-up here. Households quite understandably want to reduce debt levels, not acquire more debt. And house prices in the UK have fallen by less here than in other economies that had similar housing bubbles. So housing is expensive and unless you build more homes you're not going to bring prices down and you're not going to encourage people to borrow."


"The purchasing managers survey indicates there was little easing in manufacturers' difficult start to the year in March, suggesting that the sector not only likely suffered contraction in the first quarter but faces a tough second quarter.

"With construction output also likely to have fallen in the first quarter, it is becoming ever more apparent that it will have needed clear expansion in the services sector to have prevented a second successive GDP drop and triple dip recession.

"The only marginally positive development was that orders contracted at a reduced rate in March which seems to have been due to a slight improvement in domestic demand given that export orders fell at an increased rate due to weakness in Europe.

"It is evident that the manufacturing sector currently faces tough domestic and international conditions. Domestic demand for manufactured goods is handicapped by current muted investment intentions and tightening public spending. Furthermore, consumers' purchasing power has come under renewed pressure from a move back up in inflation to a nine-month high of 2.8 percent in February and muted earnings growth."


"The UK manufacturing purchasing managers' index has risen to 48.3 in March from 47.9 in February. Nonetheless, this is weaker than the consensus forecast of 48.7 and suggests that the sector continues to contract, which will weigh on Q1 GDP.

"Meanwhile, the Bank of England lending data shows that the number of mortgage approvals dropped to 51,700 in February from 54,200 in January, but the net amount lent actually rose by £900mn after a £300mn increase in January.

"All this still points to a very subdued economy, which will keep the pressure on the BoE to do more to offset the UK's tight fiscal stance. The one major change from last month, when BoE Governor King was outvoted, is that sterling has recovered somewhat after a steep drop. This may make some MPC members more inclined to ease policy given there was concern expressed in the minutes about sterling heading into free-fall if they had done more QE at that point. However, our central case remain for a no change decision this week."


"There seems to be a case of disappointment all round this morning. The manufacturing PMI failed to bounce back strongly, which suggest that the factory sector is still contracting so far in 2013.

"There wasn't much cheer to be going from the mortgage data either. Mortgage approvals fell back visibly over the month, making it much more difficult to blame adverse weather conditions for the weakness in mortgage commitments so far this year.

"We don't think that that is going to be sufficient to push the MPC into the sanctioning QE as soon as this week, but nonetheless, the committee can't be altogether happy with some of these indicators which have shown the economy remaining in uncertain mode.


"March PMI data indicate that the UK manufacturing sector contracted again during the opening quarter of 2013, to remain a drag on the broader economy. These weak numbers may be sufficient to tip the balance and convince more members of the MPC to consider additional QE at their meeting next week.

"The onus is now on the far larger service sector to prevent the UK from slipping into a triple-dip recession. The ongoing weakness of manufacturing and the hard to estimate impact of bad weather on first quarter growth suggest that this is still touch-and-go and that any expansion will be disappointing nonetheless.

"Manufacturers are still feeling the impact of subdued demand in domestic and export markets, as consumers and businesses rein in spending and the Eurozone remains in what seems to be a perpetual cycle of crisis. Cost-caution is also leading to manufacturing job losses, destocking of inventories and a reluctance to invest, all of which will exert a drag on the broader economy in coming months."

(Reporting by Li-mei Hoang)