Distress in manufacturing points to recession

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The economy slid closer to recession yesterday as the latest survey of business confidence among manufacturing firms showed activity has been falling for three successive months, to leave the sector shrinking at its fastest rate in a decade. Costs and prices are rising rapidly and employment falling and expected to fall further, leaving managers in their gloomiest mood in a decade or more.

The Chartered Institute for Purchasing and Supply (Cips), which conducts the monthly poll, warned of worse to come. "UK manufacturers faced a dangerous combination of deteriorating market conditions and record cost inflation in July... The latest data point to a further marked reduction in UK manufacturing output." Official statistics last week revealed that the "productive industries", comprising manufacturing and energy supply, have now seen negative growth for two quarters, and are thus in recession.

The Cips survey measures the balance of opinion among its members: scores of above 50 indicate expansion; those below 50 point to recession. At 44.3 in July, the main index of confidence has dropped to its lowest level since December 1998.

Firms appear to be copingwith increased commodity and other costs by laying off staff – especially grim news in an economy where consumer confidence is at a 30-year nadir. The seasonally adjusted Cips Employment Index for manufacturing has a reading of 43.3. Job losses have now been recorded in each of the past four months, with the rate of decline accelerating.

July saw input cost inflation rise to a new survey record, with higher commodity costs and increased borrowing costs on the one side and reduced demand on the other squeezing profits as well as employment.

A rising trend of corporate distress was confirmed in other figures released yesterday, putting insolvencies in the three months to June up 15 per cent on the same period last year.