British factory activity contracts at fastest rate since 2013

A worker attaches a connector to electrical wire on the factory floor of PP Control and Automation near Cannock, Britain.
A worker attaches a connector to electrical wire on the factory floor of PP Control and Automation near Cannock, Britain. PHOTO: REUTERS

LONDON/SYDNEY (REUTERS) - British manufacturers slammed on the brakes last month after the Brexit vote and growth eased in the euro zone, surveys indicated, with factories in China, Japan and elsewhere in Asia offering only crumbs of comfort.

The latest UK Purchasing Managers' Index, compiled by Markit, will give the Bank of England more impetus to cut interest rates after it surprised markets by holding fire in July but said most policymakers were leaning towards stimulus in August.

"Markit said that the deterioration was widespread across sectors and firm sizes, suggesting that Brexit uncertainty was weighing on many firms. The overall negative tone of the survey reinforces the case for a monetary loosening at Thursday's MPC meeting," said Scott Bowman at Capital Economics.

Many economists expect the Bank to cut interest rates by at least 25 basis points on Thursday, but are divided on whether it would restart its bond-buying programme.

Signs of a sharper slowdown in the euro zone, outside powerhouse Germany, may also add to calls for the European Central Bank to loosen policy again after it kept interest rates unchanged last month.

The ECB did leave the door open to more stimulus, highlighting "great" uncertainty and abundant risks to the economic outlook. The fitful global performance was clearly on the mind of William Dudley, a top policy maker at the Federal Reserve, who used a speech in Indonesia to urge caution on raising U.S. interest rates.

Mr Dudley, a close ally of Fed Chair Janet Yellen, warned of potential negative shocks due to the unknown fallout from Britain's vote to leave the EU, a strong dollar, and because it was safer to delay a move with interest rates so low.

Among the slew of surveys out on Monday, the Markit/CIPS UK manufacturing PMI slumped to 48.2 in July from June's 52.4, its lowest since February 2013 and well below the 50 mark that separates growth from contraction.