The Chartered Institute of Purchasing & Supply (CIPS) survey found evidence of falling orders, output and employment in manufacturing. Exporters continue to be hit by falling Asian demand and the strong pound, the CIPS said, while firms at home are struggling against cheap imports and slowing domestic demand.
Peter Thomson, the CIPS director-general, said: "The survey provides the first real evidence of a drop in UK demand. Interest rates seem to have had the desired effect of stemming consumer spending."
John Redwood, the shadow trade and industry spokesman, said: "Another day, another dreadful survey. How much more evidence does the Government need before the Secretary of State persuades the Chancellor that Labour's economic policy has gone horribly wrong and manufacturing is facing great difficulties?"
The CIPS said its Purchasing Managers Index, a composite indicator of activity in manufacturing, fell to 44.8 in July from 47.4 in June, the largest monthly decline since September 1992. A PMI reading of less than 50 indicates that a sector is contracting. In the case of manufacturing, the PMI has come in at below 50 for four consecutive months.
Adam Cole at HSBC Securities said: "I'm surprised by how quickly things are deteriorating in manufacturing. It's not just the CIPS survey, but also the CBI survey." Ten days ago the Confederation of British Industry released its influential quarterly survey of manufacturing, which pointed to a sharp fall in business confidence.
Michael Saunders at Salomon Smith Barney said: "the message from these survey readings is clear - manufacturing output is set to weaken much further from what is already a bleak position."
Sterling closed at DM2.899, a pfennig down from Friday's close, as dealers speculated that the Bank of England's Monetary Policy Committee (MPC) would not raise base rates later this week. But economists were not ruling out a rate rise altogether, saying that the recent bout of weakness in sterling and continued strong earnings growth could persuade the MPC to put up rates.
Mr Saunders said: "Despite the very weak evidence from manufacturing, we still expect base rates to rise by 0.25 points this week."
The Government yesterday faced renewed calls to alter the make-up of the MPC amid growing concern that it did not fully appreciate the problems facing UK industry.
Speaking on BBC Radio 4, John Edmonds, GMB union general secretary, said: "I'd like to see at least two or three people there with direct experience of manufacturing and industry."
David Kidney MP, a member of the Treasury Select Committee, told Radio 4's World at One: "Our view is it is slightly too narrow a base at the moment. Managing monetary policy is a fairly technical job, but nevertheless, we feel there is too narrow a background."
Other figures released yesterday showed that M0, a narrow measure of money supply, rose from year-on-year growth of 5.5 per cent in June to 5.7 per cent in July. Economists said this could be a signal of a pick- up in retail sales, but it would be unlikely to have much effect on the interest-rate decision.
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