A dismal start to the third quarter with the manufacturing PMI reporting weakness across the board, says ITEM Club

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Nida Ali, economic advisor to the EY ITEM Club, comments on today’s PMI manufacturing figures:

  • A dismal start to the third quarter with the manufacturing PMI reporting weakness across the board
  • With the Eurozone crisis continuing to dampen export demand as well as business confidence, there is little prospect of any improvement in the short-term
  • More results like this will force the Bank to extend QE later in the year

“A dismal start to the third quarter with the manufacturing PMI reporting weakness across the board. The release contained plenty of evidence pointing to underlying weakness in the sector, not least the steep decline in both domestic and export orders. While lower exports from the Eurozone were to be expected, a slowdown in demand from Asia makes for a worrying development. 
 
“There is little prospect of any improvement in the short-term, with the Eurozone crisis continuing to weigh heavily on the manufacturing sector through various channels. In addition to weak export demand from Europe, business confidence has taken a hit. This will discourage firms from investing despite massive efforts by the European authorities to contain the crisis.
 
“These results don’t bode well for Q3 GDP, although it must be remembered that manufacturing accounts for just over 10% of the economy. With the services sector having held up better in recent months, we are still optimistic that we will see a strong bounce.
 
“We don't expect the Bank to announce any change in monetary policy at this month’s meeting, but more results like this will force the Bank to extend QE further later on in the year. However, by the time that the current tranche of QE runs out, they will hope to have seen sufficient positive effects from that, and the Funding for Lending scheme, to head off the need for any further monetary stimulus.”