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U.K. manufacturing contraction eases, orders still fall

Employees work at the Rolls-Royce plant in England.

TOBY MELVILLE/REUTERS

British manufacturing activity shrank less than expected in November though the sector remained fragile as orders edged down, a survey found on Monday.

The data painted a mixed picture of the economy's prospects just two days before finance minister George Osborne is due to update parliament about his budget plans.

The Markit/CIPS Purchasing Managers' Index for the manufacturing sector jumped to 49.1 – its highest level since August – from October's downwardly revised 47.3. That beat the median forecast of 48.0 in a Reuters poll of economists and exceeded even the highest prediction of 48.9.

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Nonetheless, the index remains below the 50 mark that separates growth from contraction, where it has been since April.

"We are getting closer to the 50 level, so it is moving in the right direction, but it goes to confirm our view that U.K. economic activity in the fourth quarter remains sluggish and the immediate prospects don't look particularly bright," said Peter Dixon, economist at Commerzbank.

In a separate survey by lobby EEF, British manufacturers reported stagnant output over the past quarter – the weakest reading since late 2009 when the country was recovering from its deepest recession in more than 50 years.

Britain has suffered two recessions in the past four years, despite the Bank of England slashing interest rates to a record low of 0.5 per cent and creating £375-billion ($603-billion U.S.) in new money – equal to around a quarter of GDP – to boost economic growth.

The economy is seen growing by a tepid 0.1 per cent in the current quarter, with little pick-up predicted over next year. Recovery has been hampered by a drawn-out debt crisis in the euro zone, Britain's main trading partner, as well as by the government's tough austerity plans.

Mr. Osborne is expected to defend the austerity program in his speech to parliament on Wednesday.

In the euro zone, a contraction in manufacturing activity eased to an eight-month low in November, although a meaningful recovery still looks a long way off, a similar survey showed.

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Further afield, China's economy picked up in November but activity elsewhere in Asia was subdued as demand from the developed world remained depressed.

New orders placed with British factories fell for the second month, with the index coming in at 49.7, albeit well up from October's 47.7. New export orders fell in all but two months this year as global economic uncertainty rumbles on.

In a worrying sign for central bankers who hoped that easing inflation would help consumers spend more, manufacturers hiked their prices at the fastest pace since June, despite input costs rising at their slowest pace in three months.

Factories also cut their work force again in November.

In contrast, a PMI poll due on Wednesday is expected to show that growth in Britain's dominant services sector picked up pace in November.

"We'll need to wait for Wednesday's service sector PMI to firm the picture but, with the temporary factors that boosted growth over the summer unwinding, it seems likely that the economy will contract in the fourth quarter," said Rob Wood, economist at Berenberg Bank.

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