Economy stalls as crisis in the eurozone hits industry

Bank of England's Broadbent warns of danger that economy will slip back into a recession
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Britain's economy is stalling badly, with factory orders tumbling as export markets in the beleaguered eurozone seize up. The CBI's November industrial trends survey found that orders declined at the fastest pace in more than a year.

Firms now expect a fall in production over the next quarter, which bodes ill for the fourth quarter GDP. While in its latest revision the Office for National Statistics confirmed third-quarter growth at 0.5 per cent, much of that was down to manufacturers restocking inventories and Government spending, without which there would have been a contraction.

Ben Broadbent, a member of the Bank of England's Monetary Policy Committee, yesterday said the economy faced a 50 per cent chance of contracting in the fourth quarter and could still slip into recession. "There's clearly a risk of that," he said. "The central forecast [for growth] is around zero for Q4, so the chances of this being negative in that quarter are roughly one half."

The ONS warned that growth "tended to be concentrated in just a few components and so appears rather polarised". It added: "Households continue to face difficult financial conditions, not least because inflation is more than twice the rate of earnings growth. This, together with an uncertain labour market, is continuing to weigh down household confidence."

Of the 446 firms surveyed by the CBI, 42 per cent said export orders were below normal, with just 11 per cent saying they were better than usual. The survey balance of minus 31 per cent is the lowest since January 2010 and the first time it has fallen below the long-run average of minus 21 per cent since February 2010. Total order books also showed no improvement, with 34 per cent describing total orders as below normal compared with 15 per cent above, a sharp deterioration of the position compared with earlier in the year. Expectations for output growth were negative for the second month running.

The CBI's chief economic adviser Ian McCafferty highlighted the eurozone as a major reason for the bleak picture painted by the survey. "Developments in the eurozone, and their impact on prospects for our major trading partners, are clearly hitting the UK manufacturing sector, and we've seen a sharp decline in export order books this month. In response to weaker demand, firms still expect to cut back on production. With heightened uncertainty over global prospects and business confidence falling sharply, it is very possible that factories will see production slowing further in the near term."

Economists warned that more detailed information provided by the ONS on the third quarter GDP numbers also bodes ill for the economy, at least in the short term. Andrew Goodwin, senior economic adviser to the Ernst & Young Item Club, said the data struck "a significant blow to short-term growth prospects" and warned there was a good chance of a fall in GDP this quarter.

The Engineering Employers' Federation did, however, note an increase in manufacturing investment, which chief economist Lee Hopley described as "encouraging". She said it was crucial for investment to increase if manufacturing is to "fulfil its potential to provide the much needed rebalancing of the economy".