Manufacturing report adds to pressure on Osborne to act on economy

August 1, 2011

Pressure was mounting on Chancellor George Osborne and the Bank of England today to stimulate growth after the latest gloomy economic reports, this time from the manufacturing sector and the CBI.

Manufacturing shrank last month for the first time since the country was in the depth of recession two years ago, a survey showed, while the CBI cut its forecast for growth this year, dealing a further blow to the Government’s economic policies.

Last week official figures put growth at just 0.2% for the second quarter of this year – triggering calls by Labour and some economists for action now to avoid the country plunging back into recession.

Today's Markit/CIPS manufacturing PMI headline activity index show a fall to 49.1 in July from a revised 51.4 in June.

It is the first time it has been below the 50 mark that separates contraction from expansion since July 2009. According to Reuters, analysts had expected a reading of 51.

The Bank of England is now expected to peg interest rates at their record low of 0.5% for the remainder of this year while some commentators were today saying the bank may need to inject more stimulus into the economy.

The CBI today said it now expects national output to increase by 1.3% this year compared to the 1.7% it had been predicting three months ago. The Chancellor may now come under pressure to reduce his own 1.7% forecast amid signs that the Coalition Government’s tough stance on public sector cuts will not deliver growth without measures to encourage the private sector to take up the slack.

Victoria Cadman, economist at Investec, told Reuters: “(Osborne) would have been desperate for some better data in Q3 to put to bed the calls for a 'plan B' that he is getting.

“This makes it really difficult for Osborne. If we get a couple of more months of disappointing data in manufacturing, he will have to seriously consider if there is a plan B he can deploy."

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