Manufacturers reported the biggest drop in confidence for more than two years today as the eurozone debt crisis weakens demand.
The CBI Industrial Trends Survey showed that manufacturers' expectations for exports and the general business situation fell at its sharpest rate since the height of the recession in April 2009.
Orders and output are expected to fall over the next quarter, following modest rises in domestic demand and production over the past three months, with exports expected to show their first fall since October 2009.
The survey adds to worries that the economy is grinding to a halt and deals a blow to Chancellor George Osborne's plans to rebalance the economy towards more exports.
Manufacturers' performance worsened this month, with a balance of 18 saying their order books had shrunk, compared to a balance of nine the previous month. Export order books also deteriorated.
The volume of output in October fell to its lowest since July 2009.
CBI chief economic adviser Ian McCafferty said: "Manufacturers saw modest growth in orders and production over the past quarter.
"However, sentiment has deteriorated sharply and firms expect sizeable falls in activity over the next three months.
"Confidence among manufacturers is no doubt also being sapped by uncertainty over developments in the eurozone, leading to broader concerns over global growth."
Manufacturers now expect to shed jobs, having increased employment over the last quarter.
Mr McCafferty said he expects manufacturing output to contract by 0.5% or 0.6% in the final quarter of 2011, compared to an increase of 0.2% in the third quarter.
But he said much depends on developments in the eurozone, including a key announcement today about a rescue package for the currency bloc.
One of the few positive points in the survey was that some of the pricing pressures are now beginning to ease, with inflation expectations retreating to the lowest level since December 2009.
Howard Archer, chief UK and European economist at IHS Global Insight, said the survey was "massively disappointing".
He added: "The CBI survey fuels concern that the UK economy is in serious danger of contracting in the fourth quarter.
"Domestic demand for manufactured goods is being held back by serious headwinds, notably including tightening fiscal policy and the major squeeze on consumers' purchasing power.
"Meanwhile, a marked slowdown in global economic activity is clearly hitting manufacturers' export orders hard while the eurozone crisis is causing major uncertainty and weighing down on confidence."
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