Factories to fall to lows of recession

British manufacturing could soon sink to levels not seen since the depths of the financial crisis, leading economists have warned.

The latest closely watched Purchasing Managers' Index (PMI) for UK manufacturers is released on Tuesday. The December figures are expected to paint a bleak picture of a sector that still makes up 12 per cent of the UK economy.

Analysts believe the index will at best remain at the 47.6 seen in November. Any figure below 50 represents a contraction. Investec economist Philip Shaw said the new index could fall to as low as 45. That would be the worst reading for the manufacturing sector since early 2009, when Britain was in the grip of recession.

Chris Williamson, the chief economist at PMI publisher Markit, said that British manufacturing will not bounce back in the short-term. "UK manufacturing suffered years of neglect," he said. "It's not a case of hoping export markets will revive so we can tap into that. The whole cultural, educational and infrastructure policy needs to be looked at."

Mr Shaw said that British manufacturing, after a period of strong growth in 2010 on the back of a weak pound, has been hit by a combination of low domestic demand and firms running down their inventories. "De-stocking accentuates the downturn in the traded goods sector. That's why manufacturing tends to suffer more at this stage of the economic cycle," he said.

Another major factor behind Britain's manufacturing weakness is the eurozone crisis, which has seen governments embark on simultaneous spending and tax cuts. A host of PMI estimates from across European economies will be published tomorrow. Last month the combined European index showed activity falling for the fifth successive month to 46.9 and analysts do not expect an improvement.

"Around a half of UK exports go to the eurozone," said Mr Shaw, "and if its banking system is under threat then credit flows in the UK weaken as well because of the generalised tightening of credit conditions."

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