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U.K. Factory Production Shrank in June

  1. 08/05 12:15
    European Economies: U.K. Factory Production Shrank in June
    By Michael Bleby


    London, Aug. 5 (Bloomberg) -- U.K. factory production shrank at the fastest rate in more than two decades in June, quashing expectations the Bank of England will raise rates this year.

    Manufacturers cut production by 5.3 percent, the biggest decrease since 1979, the year Margaret Thatcher swept to power after strikes that crippled the economy. Analysts had expected a 0.8 percent decline following three months of increases.

    ``I don't see any chance of a rate rise this side of the new year,'' said Simon Rubinsohn, who helps manage 23 billion pounds ($36 billion) at Gerrard Ltd. as its chief economist. June's drop in production ``was sufficient to more than outweigh the tentative signs of recovery seen over the past few months.''

    A sputtering global economy has weakened demand for British products. In the U.S., destination for about 15 percent of U.K. exports, growth in the second quarter was less than half analysts' predictions. In Europe, banks, airlines and other service companies expanded more slowly in July, a survey found.

    The Bank of England kept its benchmark interest rate at a 38- year low of 4 percent last week. Investors no longer expect an increase this year, futures contracts show. The implied yield on the three-month Libor futures contract due December dropped to 3.86 percent from 4.66 percent a month ago.

    Filtronic Plc, a maker of antennas and filters for mobile phones for companies including Motorola Inc. and Nokia Oyj, said its full-year loss widened.

    Renishaw Plc, a U.K. maker of precision measuring equipment for customers including Boeing Co. and Rolls-Royce Plc, last month said full-year profit dropped 39 percent after demand slowed and it cut jobs.

    Losing Confidence

    ``People are not as confident as they were,'' said Nick Brayshaw, the chief executive officer of Wagon Plc, which makes auto parts for clients including Volkswagen AG and Renault SA.

    Manufacturing shrank by 8.3 percent from June a year ago, the government statistics office said, the biggest decline since May 1981. Industrial output, which includes production by mines and utilities in addition to manufacturers, fell 4.3 percent for the month and 6.6 percent from a year ago.

    U.K. bonds rose, pushing two-year yields to eight-month lows, after today's report boosted expectations the Bank of England will keep interest rates unchanged this year. The yield on the 5 percent note due in June 2004 fell 9 basis points to 3.83 percent. A basis point is 0.01 percentage point.

    A first estimate of the quarter's GDP, released last month, showed growth of 0.9 percent from the first quarter. The drop in industrial and manufacturing production in June could lower that as much as 0.3 percentage point, the statistics office said.

    U.S. Slowdown

    U.S. job growth stalled in July. Consumer confidence fell by the most in nine months, according to a survey taken during the worst stock market in five years.

    ``The U.S. is in absolute chaos,'' said Jonathan Leadbitter general sales manager for Tyne and Wear at Mayflower Glass Ltd., a northeast England-based company that makes ships in bottles and other glassware gifts. ``Our business there has been hit significantly. It's tough to export.''

    The bigger-than-expected drop in U.K. production was affected by a change in holidays this year, according to statisticians at the government's National Statistics office. A bank holiday that normally falls in May was moved into June, and an extra holiday was added for Queen Elizabeth II's jubilee.

    That led manufacturers to produce less than usual in June and more in May, the statistics office said.

    Consumers

    Manufacturing makes up one-fifth of the U.K. economy. Consumer spending, which accounts for another two-thirds, is still growing. Retail sales, which kept the economy growing last year, grew 6.9 percent in June from a year ago, the British Retail Consortium, a lobby group, said.

    Sliding equity markets heighten doubts about the strength of the economy in the U.K. The FT-SE 100 index has lost about 21 percent of its value since the start of May. The FT-SE 350 engineering and machinery index, which dropped 10 percent in 2001, has shed a fifth of its value this year.

    With the chances of an economic slowdown increasing, the likelihood rates will fall has doubled, to an average 21 percent chance from 10 percent a week ago, analysts surveyed by Bloomberg said. While none is predicting a cut, the number ruling out an increase has grown. Of 31 analysts polled last week, 14 see no change in rates, up from 10 of the 30 polled a week earlier.

    `Rattled'

    ``You have to be rattled,'' said Glenn Davies, an economist at Credit Lyonnais SA in London. ``A rate rise is out of the question. If the data continues to look weak and we get seriously worried about recession, then a cut looks more likely.''

    U.K. manufacturing shrank for the first month in six in July as new orders fell, the Chartered Institute of Purchasing and Supply said. Companies including Invensys Plc, which makes factory controls, and Hewlett-Packard Co., which sells computers, have cut staff and curbed production at U.K. factories.

    Company insolvencies in England and Wales rose in the second quarter at the fastest pace in eight years as the economy struggled to pull out of its slowest period of growth in 10 years, government figures showed.

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