Fears that the global economy is foundering escalated following a run of poor economic news that sent international stock markets sharply lower.
The Dow Jones index in the US fell 1.9pc , the FTSE shed 1.1pc and Germany’s Dax slumped 3.4pc after the release of poor global manufacturing data, higher unemployment figures for Europe and disappointing jobs numbers in the US.
The share falls were mirrored elsewhere as France’s CAC 40 lost 2.2pc and Spain’s IBEX 35 gave up 0.4pc.
Concerns that the UK economy remains mired in recession were strengthened as PMI data from Markit/CIPS showed that Britain’s manufacturing sector contracted at its fastest rate in three years in May.
Markit’s eurozone manufacturing PMI also slumped to a near-three year low, with Germany, France, Italy and Spain all suffering sharp contractions.
Rob Dobson, senior economist at Markit, said the UK manufacturing sector “took a sudden sharp turn for the worse” in May.
The index fell to 45.9 from 50.2 in April – where any number below 50 indicates contraction – reflecting widespread weakness as both domestic and foreign demand dried up.
“Perhaps of greatest concern is that this month’s drop is not simply linked to the ongoing crisis of the eurozone, but to increasing weakness of the UK domestic market, with overall order books collapsing at a faster rate than export orders,” said Mr Dobson.
It was the first contraction in six months, and much worse than economists had feared. Markit said the data indicated manufacturing output shrank by 1pc in the second quarter, suggesting Britain will remain in recession for the immediate future at least.
The survey is closely watched by Bank of England policymakers, and Mr Dobson said the poor PMI increased the chance of a “monetary shot in the arm”.
That would most likely involve the purchase of more Government bonds through an expansion of the Bank’s £325bn quantitative easing scheme.
UK manufacturing output, orders and employment all fell sharply, but the new orders measure notably plunged to 42, the lowest level since March 2009.
At that point, the economy was in the depths of recession and the MPC took the unprecedented step of cutting interest rates to the all-time low of 0.5pc. It also introduced QE for the first time in its history.
“This is a really horrible survey and a real economic dampener ahead of the Queen’s Diamond Jubilee celebrations,” said Howard Archer, chief UK economist at IHS Global Insight.
The manufacturing sector, which accounts for 10pc of the UK economy, shed jobs for the first time in five months in May as employers were increasingly cautious.
One benefit of the gloomy news globally was that the UK government’s borrowing costs fell to a new record low. The yield on benchmark 10-year bonds fell to 1.47pc as investors scrambled for safe havens.----
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