UK Manufacturing Surges in December

LONDON--Activity at Britain's factories surged to the highest level in more than a year in December, according to a survey published on Wednesday, though economists said the strong performance won't be enough to prevent the U.K. economy from shrinking in the final quarter of 2012.

Data firm Markit and the Chartered Institute of Purchasing and Supply said their monthly purchasing managers' index for the manufacturing sector rose to 51.4 in December from 49.2 in November. A reading over 50 indicates an expansion in activity. The monthly PMIs precede official growth figures and are watched closely by policy makers seeking clues to the economy's health.

Markit said the expansion reflected a rise in factory output at producers of consumer goods, a reflection of stronger domestic demand. Job losses in the manufacturing sector in December were negligible, the survey found.

An expansion was last registered in March 2012, and December's reading was the highest since September 2011 and considerably ahead of economists' expectations. Sterling rose against the dollar and the euro following the data's release, at one point reaching $1.6335 compared with $1.6242 at the previous day's close.

Firms also reported fatter order books, a promising signal as the economy begins 2013. But exports remained weak in December, according to the survey, a reflection of economic gloom in the euro zone, the top destination for U.K. trade. Rob Dobson, senior economist at Markit, said output in the manufacturing sector probably shrank in the fourth quarter as a whole despite December's better-than-expected performance. Samuel Tombs, an economist at Capital Economics, said he doubts the improvement in domestic demand will prove sustainable, as consumers continue to grapple with meager wage growth and stubbornly high inflation.

"The sector is far from out of the woods. The decline in new export orders demonstrates that challenging global economic conditions and the euro-zone crisis continue to act as a drag," said David Noble, Chief Executive of CIPS.

The U.K. economy is expected to shrink 0.1% on the year in 2012, according to a range of independent forecasts compiled by the U.K. Treasury, as it labors under a government austerity drive and the fallout from the debt crisis rocking the neighboring euro zone.

The economy recorded a 0.9% quarter-on-quarter expansion in the third quarter, boosted by the 2012 Olympic Games in London, but many economists anticipate the economy will contract again in the final three months of the year. That would put the U.K. at risk of entering an unprecedented "triple dip," or a third recession in quick succession. Economists often define a recession as two consecutive quarters of falling output.

With overseas demand for British goods and services weak and the government cutting back, the economy's performance at the tail-end of 2012 will depend in large part on Britons' appetite for spending. Retailers will soon begin updating investors on how they performed over the crucial Christmas period. Fashion chain Next PLC (NXT.LN) kicks off the reporting season on Thursday, with grocer Tesco PLC (TSCDY) and high-street stalwart Marks & Spencer Group PLC (MAKSY)due to follow next week.

Economists believe 2013 will be another tough year for the U.K. economy, with annual growth predicted at just 1.1%, according to forecasts compiled by the Treasury. That could hamper Chancellor of the Exchequer George Osborne's efforts to rein in a persistent budget deficit and prompt further monetary stimulus from the Bank of England.

Write to Jason Douglas at [e-mail]

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