Footsie and sterling dive as manufacturing stalls

NEW SIGNS that the economy is stalling helped send share prices tumbling and took the pound lower on the foreign exchanges yesterday.

The FTSE-100 index ended more than 206 points lower at 5,537.5 in its biggest one-day fall in points since the crash of October 1987. Sterling lost more than two pfennigs against the German mark, falling as low as DM2.7765 during the day.

Early weakness on Wall Street, although later reversed, added to the gloom in London. The news of another mega-merger did nothing to lift share prices.

"These mergers reflect companies trying to address a very hostile trading environment," said Richard Kersley, equity strategist at CSFB.

Business surveys on both sides of the Atlantic showed weaker than expected activity in manufacturing last month.

Wall Street shrugged off the US figures, which showed manufacturers struggling in the face of dismal export orders. "Manufacturing is in recession but consumer confidence is strong. The economy is slowing but not collapsing," said Ian Shepherdson of High Frequency Economics in New York.

The UK's survey of purchasing managers in manufacturing painted an altogether bleaker picture, with activity declining for the eighth month running. The index dropped from 41.4 in October to 41.1, the furthest below the 50 boom-bust dividing line it has reached in its seven-year history. Prices charged also fell at the fastest rate recorded since the survey began.

Peter Thomson, director general of the Chartered Institute of Purchasing and Supply, said: "Worryingly, declining activity levels are increasingly being translated into more widespread redundancies."

A separate survey of services launched yesterday by the Confederation of British Industry revealed growing pessimism in that sector of the economy too. The volume of business had increased during the past three months, but companies expected slower growth in the next three months, and have become pessimistic.

Although the prices they charged had declined, the 326 firms responding to the survey reported a sharp increase in their costs.

There was some comfort for industry yesterday from Mervyn King, deputy governor of the Bank of England. Mr King said members of the Bank's Monetary Policy Committee had "soft hearts but hard heads". They would not use interest rates to target lower unemployment because there was no long- term trade off between jobs and inflation.

"Sustainable reductions in unemployment require a combination of monetary stability on the demand side and microeconomic reforms such as the New Deal on the supply side," he said in a speech to the Employment Policy Institute. But Mr King added that the Bank would try to avoid "undesirable instability" in employment and output.