Manufacturers report toughest trading conditions for three years - The Guardian

Manufacturers are suffering the toughest trading conditions in almost three years, according to an industry survey out on Monday that punctures hopes of an Olympics boost to the economy.

The Engineering Employers Federation (EEF) says export growth slowed dramatically in the third quarter, while UK orders fell for the first time in more than two years.

Manufacturing data is expected to add to the gloom, with the monthly purchasing managers' index likely to show the sector contracted in August. Services data out on Wednesday is expected to show some growth, although it may not be enough to lift the UK economy out of recession.

The latest official estimates showed the UK economy shrank by 0.5% between April and June, the third quarter in a row where economic output dropped. Policymakers had been hoping that a boost from the Olympic Games would help lift the economic gloom, but there is a mounting evidence that suggests otherwise.

The data will be closely watched by the Bank of England's monetary policy committee, which meets on Thursday to discuss interest rates and any further stimulus to the economy. Last week, US Federal Reserve chairman Ben Bernanke signalled his willingness to embark on a third phase of money creation to boost the US economy, but economists say the Bankis unlikely to follow suit. It is expected to keep rates on hold at 0.5% and make no increase to the quantitative easing programme of £375bn, as the bank waits to gauge the impact of stimulus programmes such as the Funding for Lending scheme.

The European Central Bank is also meeting on Thursday and markets will be hoping for a cut in rates from 0.75%. The bank is also expected to announce details of the scheme to buy bonds from crisis-hit countries.

EEF survey – compiled with accountants BDO – shows that a balance of just 4% of manufacturers said output had increased in the third quarter, down from 20% in the second quarter. Only 3% said orders had increased, down from 17%.

Domestic demand for goods fell for the first time in two-and-a half years, while growth in overseas sales dropped back. Prices also fell, putting manufacturers' margins under growing pressure, with a balance of 23% reporting a deterioration in export margins, and 19% seeing a squeeze on margins from UK sales.

The EEF's chief economist, Lee Hopley, said: "The weaker global outlook precipitated by the ongoing economic challenges in Europe has clearly hit home in our latest survey. Pockets of growth still remain in some sectors, but overall confidence appears to be draining away. The sharp drop in export balances over the past quarter is a particular concern given their importance to UK manufacturers and also our economy's reliance on exports as a source of growth."

In a worrying twist, the survey suggested demand faltered across the globe and not just in crisis-hit eurozone countries. Tom Lawton, head of manufacturing at BDO, said: "The results of the survey paint a dark picture with weakening markets across the board. Inevitably Europe continues to serve as a drag on exports and even the previously buoyant emerging markets are beginning to falter."

There were some brighter spots in the survey, which showed a balance of 15% of manufacturers plan to increase investment in the next twelve months. Recruitment figures were also positive, with a balance of 16% of companies saying they increased staff numbers over the past three months.

That more upbeat message was echoed by a survey showing business sentiment improved in August, for the third consecutive month. The Lloyds Bank business barometer showed 10% more businesses were optimistic rather than pessimistic about the economy. But the balance remains low by historical standards, and Lloyds said the results suggest the economy is still set to weaken in the third quarter.

Trevor Williams, chief economist of Lloyds Bank wholesale banking and markets, said: "Businesses are still operating in an uncertain environment and so time will tell if this is a sustained upturn."

The manufacturing and services PMIs out this week will be the first clear indication of how the economy has fared in August. Economists are expecting the manufacturing index to come in at 46.1, significantly lower than the 50 mark, which separates growth from contraction. Forecasts suggest the services index will come in at 51.1, although some economists expect a figure much closer to 50, suggesting only minimal growth in this key sector.