Manufacturing beat expectations in December, showing signs of stabilising after a two-month decline as orders from China and Germany picked up, although the risk of another recession persists, a survey shows.
The Markit/CIPS Manufacturing Purchasing Managers' Index (PMI) rose to 49.6 from an upwardly revised 47.7 in November, data compiler Markit said on Tuesday. The reading was still below the 50 mark that signals growth in activity but only slightly and the reading confounded forecasts in a Reuters poll for a fall to 47.4.
Over the fourth quarter as a whole, the sector registered its worst performance since the second quarter of 2009 when Britain was in deep recession, said Markit economist Rob Dobson.
Manufacturing will therefore likely be a drag on the Q4 GDP figures, he said.
Manufacturers are also leaning heavily on backlogs of work to prop up production. This is only a temporary fix, and the trend in overall order books needs to improve if the sector is to avoid a protracted period of lacklustre performance.
A Reuters poll last month saw an even chance of another recession in Britain in 2012.
The Bank of England sees the economy stagnating until the middle of next year, and some policymakers have warned it may shrink in one or two quarters as the euro crisis is weighing on business confidence and cash-strapped consumers are cutting back spending.
The central bank started injecting an additional 75 billion pounds into the economy in October and many economists expect another increase in its asset purchases in February to shore up the economy.
A sharp drop in UK industrial production and services output in October raised the prospect of an economic contraction in the final three months of this year.
The debt crisis in the euro zone, Britain's biggest trading partner, is hurting demand for UK exports as euro zone consumers are being hit by austerity measures to try and tackle the debt problems.
The UK PMI survey showed that export orders posted their first monthly rise since July, with the index rising to the highest level since April, helped by stronger demand for goods from China, Germany and eastern Europe.
However, overall orders still fell, albeit at a much slower pace than in the previous two months. Output was largely stable as companies cleared order backlogs.
Outstanding business fell for the 11th consecutive month, Markit said. The rate of depletion was broadly unchanged from November, when backlogs fell at the quickest pace since August 2009.
Weak demand and competition pressures limited companies' ability to raise prices in December, Markit said.
The output price index dropped to 50.8, the lowest level since October 2009, as input costs fell at the fastest pace since June that year. The figure lends support to the Bank of England's forecast that inflation will drop sharply in 2012.
(Reporting by Olesya Dmitracova; Editing by Susan Fenton)