Recession risk eases as manufacturing rebounds

LONDON (Reuters) - Britain's manufacturing sector unexpectedly returned to growth in January as orders rose for the first time in six months, indicating the UK could skirt recession if the sector continues to recover in coming months.

The Markit/CIPS Manufacturing Purchasing Managers' Index (PMI) rose to 52.1 - the highest level since May - from an upwardly revised 49.7 in December, data compiler Markit said on Wednesday.

That was the first reading above the 50 mark that separates growth from contraction since September and beat analysts' forecasts that the sector would stagnate.

"This surprising rebound in January means a return to recession is by no means a certainty," said Markit economist Rob Dobson.

Output expanded at the fastest pace since March, helped by the first rise in new orders in more than half a year and clearance of backlogs of work.

Firms said some British clients were now more willing to spend, while export orders grew for a second month in a row, with firms reporting better demand from clients in Brazil, China, the Middle East and the United States, Markit said.

The economy shrank in the final quarter of 2011, as manufacturers and construction companies scaled back production. That suggested the UK was heading for recession - defined as two consecutive quarters of contraction - and boosted expectations the Bank of England's Monetary Policy Committee (MPC) would soon give it another cash injection.

However, the rebound in manufacturing in January may put a question mark over the need for additional asset purchases although more months' data is needed to see if recession can actually be avoided.

"The upturn in the PMI may cause some members of the MPC to wonder if further stimulus is still warranted," Markit's Dobson said.

Economists polled by Reuters have forecast the central bank will announce a 50 billion pound expansion to its quantitative easing programme next week.

The PMI showed that manufacturers' input costs fell last month at the fastest pace since mid-2009 and that could still encourage the central bank to announce more asset purchases in order to support economic growth.

Factory-gate prices continued to rise, albeit at the weakest rate in the current 27-month period of inflation, Markit said. Some manufacturers noted that lower raw material costs and the need to lure cash-strapped clients kept price rises in check.

Employment in the sector was broadly unchanged in January. Overall, small and medium-sized firms expanded their workforce to handle increased production, but large companies cut jobs to control costs and in response to economic uncertainty.

(Reporting by Olesya Dmitracova; Editing by Susan Fenton)