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Longer U.K. slump looms as factories falter

In this file photo, fitters work on a submarine at Perry Slingsby Systems factory in York, England.

Jim Ross/The Globe and Mail

British manufacturing output posted a unexpected fall in April, raising the risk of a longer recession and turning up pressure on policymakers to take action to boost economic growth.

The Bank of England shied away from injecting more cash into the struggling economy last week, but on Monday central banker Adam Posen called for further purchases of assets, focusing on loans to small and medium-sized companies.

Britain is still suffering from the slump in the wake of the 2007-2009 financial crisis and slipped back into recession around the turn of the year as the euro zone crisis is hitting exports and is making companies reluctant to invest and hire.

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Manufacturing output dropped 0.7-per-cent in April after a 0.9-per-cent rise in March, disappointing forecasts for an unchanged reading, the Office for National Statistics said on Tuesday.

The wider reading of industrial output, which includes energy production and mining, was unchanged in April after a 0.3-per-cent drop in March, but also below forecasts.

"Given that the euro zone crisis has intensified since April and recent manufacturing surveys have been very weak, it seems likely that the industrial sector will remain a drag on overall GDP growth for some time to come," said Samuel Tombs, economist at Capital Economics.

Adding to a gloomy picture, the outlook for the British housing market worsened as the euro zone crisis deepened and sales took a temporary hit from the expiry of a tax holiday, while growth in permanent job placements slowed in May and employers said they expected to take on fewer new staff in the months ahead.

In another reminder of how closely Britain's economic fortunes are linked with continental Europe's, the Society of Motor Manufacturers and Car Traders said that the country could produce a record two million vehicles in 2015 provided the demand from the euro zone held up.

Finance minister George Osborne warned on Sunday the crisis in the euro zone was killing off the recovery in Britain, though even members from his own conservative party have called on him to take stronger action to boost growth.

However, Mr. Osborne's hands are tied by his pledge to erase the country's huge budget deficit, which is still around 8 per cent of GDP. But the coalition government has promised to come up with further steps to unblock infrastructure spending.

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Hopes of an early end to the slump have already been dented after a PMI survey indicated that the manufacturing sector shrank at its fastest pace in three years in May, as orders nosedived.

The surprise drop had triggered speculation that the central bank would restart its asset purchases, though the BoE held back as concerns over high inflation outweighed growth worries.

"The thing the BoE can do something about is the weak underlying manufacturing activity," said Alan Clarke, economist at Scotiabank.

"That was worryingly weak even before the manufacturing PMI fell off a cliff," he said. "We should brace for a bit more weakness in the months ahead."

Industrial output was dragged down in April by a drop in the manufacturing of basic pharmaceutical products and preparations, as well as in the category of other manufacturing and repair.

Moreover, a 13.6-per-cent monthly jump in electricity and gas output caused by the coldest April since 1989 was offset by a 6.4 per cent fall in oil and gas extraction, due to the closure of a North Sea platform after a gas leak.

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