UK manufacturing unexpectedly shrinks in April as EU vote approaches

By Ana Nicolaci da Costa

LONDON (Reuters) - British manufacturing output unexpectedly shrank to hit its lowest level in three years in April, a survey showed on Tuesday, suggesting the economy will slow further before next month's in-out European Union membership referendum.

With uncertainty surrounding the June 23 vote, factories are also struggling with a weaker global economy and a slowdown in the oil and gas industry, a major customer.

Sterling fell and gilt futures rose after the Markit/CIPS manufacturing Purchasing Managers' Index fell to 49.2 from 50.7 in March, the first time since March 2013 it has fallen below the 50 mark that separates expansion from contraction.

It was below even the lowest forecast in a Reuters poll of economists.

"The sharp drop to a three-year low and another month of reported job cuts could be the clearest sign yet that referendum uncertainty is starting to weigh on the real economy," Lee Hopley, chief economist at EEF, a manufacturers' lobby, said.

Manufacturing failed to boost the overall economy for most of the past year and the latest survey suggested the recovery will continue to rely on Britain's dominant services industry.

A Markit survey of the services sector is due on Thursday.

Economists at UBS said the economy could lose momentum between April and June more sharply than their current forecast for quarterly growth of 0.3 percent.

Growth slowed to 0.4 percent in the first quarter from 0.6 percent in late 2015, putting the country in the unusual position of lagging France.

A measure of employment in the manufacturing survey was below the 50 mark for the fourth straight month, the latest sign that the labour market is losing steam.

"We expect that sentiment will continue to worsen in Q2 16 as the 23 June referendum on EU membership draws nearer as businesses become even more cautious with regard to hiring, spending decisions and investment," Barclays said in a note.

Markit said new orders in April matched February's three-year low and new export orders contracted for the fourth straight month as the global economy slowed.

The Bank of England has pointed to signs that uncertainty surrounding the EU referendum is curbing investment while recent data suggests that caution is affecting the labour market.

On Tuesday, two separate surveys painted a weak picture of salaries on offer for new hires.

Britain's average advertised salary was little in March from February and down 2 percent versus a year ago, online jobs search engine Adzuna said.

A separate survey by job site CV Library showed the average salary fell 3.4 percent in April from March.

(Editing by William Schomberg and John Stonestreet)