The Confederation of British Industry's survey of trends in manufacturing showed a further slowdown this month. The survey is the last economic news before Tuesday's Budget.
However, the employers' organisation said there was no evidence that the economy was heading into recession. It advised the Chancellor to keep Budget tax cuts prudent to avoid the need for higher base rates in future.
The CBI's economists trimmed their forecast for growth down to 2.5 per cent next year from an expected 2.7 per cent this year, but predicted a faster pace of expansion in 1997.
Sudhir Junankar of the CBI said: ''I do not think the evidence suggests we are at a defining moment when the economy stops growing.'' After a few sluggish months demand would pick up part-way through 1996, he said.
The CBI's forecast assumes that modest tax cuts announced next week are paid for by reductions in government spending. It predicts base rates could then fall half a point early next year, at the same time as inflation declined towards the Government's 2.5 per cent target.
On the other hand, a tax giveaway of pounds 4bn not financed by reducing expenditure would take inflation above the target. This would bring the danger of higher interest rates.
Kate Barker, the CBI's chief economist, admitted that the main risk was that growth would turn out lower than forecast. November's survey of industrial trends showed that the expansion had slowed down. ''But there is nothing in the survey to say there is a manufacturing recession,'' she said.
The balance of firms expecting output to rise during the next four months over those expecting a decline fell to 9 per cent. There was a negative balance of 9 per cent expecting above-normal orders in the next four months.
Export orders were the lowest in any monthly survey since June 1994, although still close to normal. Domestic orders were weaker than export orders.
Companies said their stocks of finished goods were more than adequate to meet demand, with the November balance of 18 per cent similar to recent months and significantly higher than earlier in the year. Big firms reported the highest stock levels. Producers of intermediate goods - and especially artificial fibres - reported well above normal levels. Ms Barker said: ''This is clearly dampening expectations of increasing output into the new year.''
Despite the continued slowdown, the balance of firms expecting to raise prices increased to 15 per cent, up four points in a month. The CBI said this reflected the traditional rise in list prices in January. Adjusting for this effect, price expectations were roughly flat.