Tighter credit conditions and weaker global demand put the brakes on Britain's manufacturing sector in October while retail sales growth slowed for a third consecutive month. Thursday's weaker-than-expected figures provided the first real evidence the economy is feeling the pinch from turbulent credit markets.
The pound fell from a 26-year high against the dollar as investors bet Britain's central bank may cut interest rates sooner rather than later to shore up growth.
"The key question is whether the slowdown is marked enough yet for the Bank of England to trim interest rates as early as next week," said Howard Archer, chief UK economist at Global Insight.
"We suspect that it isn't given significant inflationary pressure but the CBI and manufacturing purchasing managers surveys are suddenly making it look a markedly closer call." The US Federal Reserve cut interest rates for a second straight month on Wednesday but a Reuters poll of economists gives no more than a 25 percent chance the Bank of England will follow suit next Thursday.
Most strategists reckon the Bank will hold fire until early next year, not least because Britain's economy - at least up until the end of the third quarter - has been surprisingly robust.
Britain's economy expanded at its fastest annual rate in more than two years in the third quarter. Thursday's figures, however, suggested it began the final quarter of the year in a more fragile state of health.
The manufacturing purchasing managers' index compiled by the Chartered Institute of Purchasing and Supply/NTC showed activity eased to its slowest rate this year in October.
The headline index fell to 52.9, its second consecutive monthly decline and well below forecasts for a reading of 54.4. There were marked falls recorded in output, new orders and employment. "The weakening was across the board," said George Buckley, chief UK economist at Deutsche Bank. "This goes to show how quickly prospects can turn around."
A survey by the Confederation of British Industry also painted a subdued picture, showing retail sales growth slowed in October to its slowest rate since last November.
The CBI attributed the slowdown to higher borrowing costs and uncertainty caused by turmoil on financial markets. "October's CBI distributive trades survey is the first tentative evidence that high street spending is finally slowing," said Vicky Redwood at Capital Economics.
She said the fall in the CBI's sales balance was consistent with annual growth in the official retail sales measure falling to around 3.5 percent, a far cry from the 6.3 percent rate seen in September. How quickly the Bank of England will respond with lower interest rates remains in doubt, however.
In a speech on Wednesday, BoE chief economist Charles Bean said the Bank could not afford to lower its guard against inflation even if recent credit market turbulence had softened the growth outlook.
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