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UK Manufacturing Slump Signals Aggresive BoE Easing (powered by Bank of America) |
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01.12.08 12:22 |
| | | UK Manufacturing Slump Signals Aggresive BoE Easing
With the economic activity in the UK lurching to new depths in 4Q and inflation pressures all but evaporating, the Bank of England is set to make a further deep rate cut this Thursday, in our view.
According to the latest CIPS purchasing managers' survey data, the manufacturing sector in the UK is under extreme pressure as demand--both domestic and abroad--dwindles amid the worse economic downturn since at least the early 1990's recession. The headline PMI slumped to 34.4 in November, by far the weakest reading since the series was created 16 years ago--the previous record outside of the current downturn was the 41.6 recorded in late 1998. The November plunge outstripped expectations for a fall to only 39.7.
Survey details revealed that manufacturing output slumped 10 points in November to 31.9, the lowest level in survey history. With both domestic and foreign demand firmly in reverse gear, the new orders index tumbled to 29.7 last month, again a survey low, from 37 in October. New export orders continued to slide--likely a reflection of deepening recession in the Eurozone--with the associated index dropping to 37.1 in November from 42.8. Signs of a dramatic deterioration in the labour market over the past few months continued to grow, with the employment index falling to a series low of 35.7 in November from 40.2 the month before. Meanwhile, inflation pressures have all but disappered. Output prices grew at their weakest pace since April 2006, at 52.1 last month, down from 59.0 while input prices fell 10 points, to 44.2, signalling outright declines.
Separately, Bank of England mortgage and lending data continued to point to a housing market under major stress. Mortgage approvals edged back down to a series low of 32k in October from 33k the month before. Net secured lending fell back to an extremely weak £0.5bn in October, after the minor bounce to £1.5bn in September which had followed the £0.7bn fall in net lending in August as households in aggregate paid more back on their mortgages than they borrowed. In the heyday of the housing market boom between 2005 and 2006, net secured lending had routinely averaged between £8.0bn and £10.0bn per month. Although consumer credit edged up to £0.8bn in October, this was from a 15-year low of £0.3bn in September.
With the recession tightening its grip in 4Q and short-term libor rates still very elevated, we believe the BoE has little alternative but to lower the Bank rate aggressively. Today's slump in the manufacturing PMI, which tells a story of a capitulation of demand, rapidly falling employment, and growing disinflation, heightens the pressure on the BoE to make a further deep interest rate cut on Thursday. We are looking for at least a 100bp cut to take the Bank rate down to 2.0%. After today's dismal PMI data we see a chance of an even larger cut. We continue to look for a 1.5% trough in the Bank rate by January but acknowledge that if the UK economy continues to deteriorate at the current pace without any respite, rates may fall to 1.0% or below by 2Q 2009.
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