Confidence 'draining away' as UK order books shrink

Global weakness sees manufacturing output at lowest level since end of last recession in 2009

Britain's manufacturers are enduring the toughest conditions for nearly three years as Europe's debt crisis plays havoc with the sector and confidence "drains away", according to a worrying new survey.

The latest snapshot of the sector's fortunes from the EEF manufacturers' association painted an alarming picture of sliding orders and production levels during the past three months.

Although manufacturers managed to grow exports slightly over the quarter, the EEF's survey of almost 400 firms found UK order books shrinking for the first time in two and a half years. Output overall is at its lowest level since the end of 2009, at the end of the last recession.

The EEF's survey is a fresh blow to the nation's recovery prospects after the CBI and the British Chambers of Commerce pared back their growth forecasts for 2012. Both organisations are now pencilling in a shrinking economy this year and the Government's official watchdog, the Office for Budget Responsibility, is almost certain to prune back its own growth estimates from the 0.8 per cent expansion predicted in March. Manufacturers account for around 12 per cent of the overall economy and the EEF expects industry output to shrink 1.5 per cent this year.

Lee Hopley, the EEF's chief economist, said: "The weaker global outlook precipitated by the ongoing economic challenges in Europe has clearly hit home in our latest survey. Pockets of growth still remain in some sectors, but overall confidence appears to be draining away.

"The sharp drop in export balances over the past quarter is a particular concern given their importance to UK manufacturers and also our economy's reliance on exports as a source of growth."

The gloomy signs follow the latest official figures showing a 0.5 per cent slide for the economy between April and June, with growth virtually stagnant for the past two years. The Bank of England expanded its quantitative easing programme to £375bn in July in response to economic weakness and launched its £80bn Funding for Lending scheme in August.

Despite the order blow, manufacturers are planning to boost investment over the next 12 months, although bigger firms are more bullish about spending than smaller players.

Tom Lawton, head of manufacturing at the accountancy firm BDO, which helped compile the survey, said: "The results paint a dark picture with weakening markets across the board. Inevitably Europe continues to serve as a drag on exports and even the previously buoyant emerging markets are beginning to falter.

"With this extremely testing global backdrop it is crucial that manufacturers remain not only lean but also nimble enough to respond to future opportunities as and when they arise. This is something that the sector has not been good at in previous recessions."