By Ana Nicolaci da Costa
LONDON (Reuters) - British manufacturing shrank at its fastest pace in more than three years in July and business confidence tumbled following the Brexit vote, according to surveys that show an increased chance of a recession ahead.
The news will give more impetus for the Bank of England to cut interest rates this week.
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Falling output and new orders pushed a closely watched index of factory purchasing managers to its lowest since February 2013, adding to signs that Britain's decision to leave the European Union is hurting the economy.
Sterling slid to a three-week low against the euro after the manufacturing survey.
British accountants, meanwhile, said that confidence plunged just after the EU vote, while the Confederation of British Industry said on Sunday that firms expect economic growth to grind almost to a halt over the next three months.
This all fuels the case for the BoE's first rate cut since 2009 but also highlights the challenge it faces as sterling's slide since the June 23 vote puts upward pressure on inflation.
"The collapse in the total orders balance ... signals that support from the weaker pound simply is not powerful enough to offset slumping domestic demand," Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said.
"Meanwhile, the pick-up in the prices charged balance to its highest level in almost two years demonstrates that the (BoE) Monetary Policy Committee cannot relax about the inflation outlook when considering policy easing measures this week."
Inflation remains very low, however.
The Markit/CIPS UK manufacturing purchasing managers' index(PMI) fell to 48.2 in July from 52.4 in June, below an initial "flash" reading reported in late July of 49.1 and its lowest since February 2013.
Measures of output and new orders also fell below the 50 mark that denotes growth for the first time since early 2013 due to weaker market conditions at home and uncertainty related to the EU referendum.
The output index fell to 47.8 in July from 53.6 in June, its lowest since October 2012, while new orders - which grew robustly in June - suffered their sharpest turnaround since 1998 and fell at their fastest rate in over three years.
Barclays said the purchasing manager survey suggested Britain would enter a recession, contracting by 0.4 percent quarter on quarter at the end of September and by 0.3 percent in the fourth quarter.
That would be followed by "a prolonged and shallow contraction", it said.
RATE CUT COMING
Almost all economists polled by Reuters expect the Bank of England to cut interest rates by at least 25 basis points on Thursday, but they were split on whether the Bank would restart its bond-buying program. [BOE/INT]]
Average purchase prices rose at their fastest pace in five years, with companies citing higher commodity prices and higher import prices, the latter due to the weaker currency. Output price inflation was also the highest in nearly two years.
The boost to exports from a weaker pound was less marked than previously estimated, Dobson said. Growth in new export orders slowed in July after hitting a seven-month high in June.
When Britain last suffered a big fall in its currency during the 2008 financial crisis, inflation stayed above the BoE's 2 percent target for rather longer than expected, while exports failed to gain much.
But inflation in June was far below target at just 0.5 percent, and there has been little sign in recent years that one-off price shocks get baked in to long-run inflation trends.
Since Brexit, there has been no official data shedding real light on the impact of the vote on economic output.
But there are signs consumer confidence is struggling, and Markit said its earlier one-off "flash" PMI surveys were consistent with the economy shrinking by a quarterly 0.4 percent if they persisted.
British finance minister Philip Hammond downplayed the flash PMI numbers saying they were a measure of sentiment and not of "hard activity".
(Additional Reporting by David Milliken; Editing by Jeremy Gaunt)