Fears grew yesterday that the UK economy could be entering a period of very weak growth as manufacturers and retailers shake out excess stocks. This gloomy outlook for the months ahead will intensify the pressure on the Chancellor to stimulate activity by a more aggressive cut in interest rates.
The weakness in the economy is centred on manufacturing, where output fell by 0.2 per cent in the final quarter of 1995. "There is a very good chance that there will be a further quarter of declining output which will put manufacturing formally into recession," said Simon Briscoe, UK economist at Nikko Europe.
Total output in the economy could grow by just 0.25 per cent in each of the first two quarters of 1996, warned David Walton, UK economist at Goldman Sachs. This would leave the Chancellor way off his ambitious 3 per cent growth forecast for 1996 compared with 1995.
Concern about the short-term outlook intensified following the release of official figures on inventories in manufacturing and distribution in the final quarter of last year. These painted an unexpectedly buoyant picture of stockbuilding, suggesting that an unwinding in surplus inventories has been deferred to this year.
Another cause for gloom came from a sharp 9 per cent fall in capital spending by manufacturing. Pointing out that this was the biggest quarterly drop for five years, Andrew Smith, shadow chief secretary to the Treasury, said "these worrying figures reveal further evidence of the lack of confidence in the underlying state of the economy."
However, William Waldegrave, Treasury Chief Secretary, pointed rather to the 6 per cent increase in manufacturing investment in 1995 compared with 1994. He said that the Treasury expected this to continue.
The latest official statistics followed a dispiriting survey from the Confederation of British Industry on the state of manufacturing. This showed that a majority of industrialists had order books which were well below normal and levels of stocks that were excessive.
Confirmation of this came in official statistics showing that the production and distribution industries increased their stocks in the final quarter of last year by pounds 1bn. The size of the increase - only pounds 200m less than in the third quarter - put a big question mark over growth prospects in the first half of 1996. The worry is that manufacturers and retailers will now be forced to run down these surplus inventories. As they supply demand from stocks rather than from new output, so growth will fall sharply.
"Manufacturers and retailers are stuffed to the gills with stocks," said Mr Briscoe.
Manufacturing inventories rose by pounds 647m, not much less than the pounds 769m increase seen in the third quarter, which itself had been the biggest for seven years. Coming at a time when manufacturing output was actually falling, the rise in stocks looks involuntary especially as there was a big increase in the manufacturing stock/output ratio. Mr Walton described both the length and the size of the the rise over the last five quarters as "unprecedented." This was because it came against a trend decline in the ratio over the past 15 years as manufacturers have economised on their use of inventories through methods such as "just in time" working.
Despite the weakness of manufacturing, economists still think the economy will pick up sharply after the inventory correction is over. Activity is likely to be sustained by the resilience of the consumer. Earlier in the week, the Central Statistical Office revealed that consumer spending had risen by by 2.4 per cent in the year as a whole.