Factory output hits new depths

Order books at British factories are in their worst state for nearly 30 years and the labour market is shrinking rapidly, adding weight to predictions that a full-blown recession is just around the corner and intensifying pressure on the Bank of England to cut interest rates tomorrow.

Manufacturing output fell by 0.4 per cent in August, the Office for National Statistics revealed yesterday. The drop was the sixth consecutive month of contraction, marking the longest run of negative growth since 1980. The electrical and optical equipment sector was the worst hit, with output falling by 3.1 per cent. The transport sector, including the car industry, fell by 2.3 per cent, while food, drink and tobacco production was down 1.6 per cent.

Retailers are also continuing to feel the pinch, with Bhs saying yesterday that its profits had slumped. And the executive recruitment agency Michael Page also warned of a serious slowdown, confirming that the City is in trouble too.

Despite the impact of the credit crisis over the past year, Britain has so far avoided the two consecutive quarters of negative economic growth which are the official definition of recession. But analysts say it will not be long, and that the country's third-quarter gross domestic product, due to be published later this month, could be as low as minus 0.3 per cent. Alan Clarke, a UK economist at BNP Paribas, said: "The economic situation is grim and is going to get worse. Today's manufacturing numbers show the sector is clearly contracting. It is not rocket science to see that the services industry is also on its knees, which highlights the probability that the entire economy is in recession. We can expect three or four quarters of negative GDP growth and then only a slow climb back."

Falling confidence and sales are already taking their toll on jobs. Permanent placements by recruitment agencies fell for the fifth month in a row in September, and are plummeting at their fastest rate since October 2001, says a report by the Recruitment and Employment Confederation and KPMG yesterday. Temps are faring even worse, with fewer contracts available than at any time in the survey's 11-year history. There is also an inevitable impact on salaries – permanent staff pay stayed flat in September after 61 months of growth, as salaries for temporary staff rose at their weakest rate for five years.

Against the backdrop of mayhem in the banking sector and relentlessly grim statistics from across the economy, the Bank of England's Monetary Policy Committee faces overwhelming pressure to cut interest rates at its monthly assessment meeting which starts today and concludes tomorrow.

John Philpott, chief economist at the Chartered Institute of Personnel and Development, said: "A sombre September, awash with bad economic news, has caused more employers to take steps toward cutting staff levels. A significant decline in the demand for labour this winter now seems clear, which strengthens the case for the MPC not only to cut interest rates but to cut big."

Despite the slowdown, the MPC has so far resisted calls to cut rates because of inflationary concerns. The Bank of England Governor, Mervyn King, has already had to write to the Chancellor twice this year to explain why inflation has outstripped the Government's 2 per cent target. It was running at 4.7 per cent in August and is expected to rise to 5 per cent before it starts to come back down next year.

But with the economy falling so sharply, inflation is taking a back seat and experts are predicting an interest rate cut of up to 0.5 per cent tomorrow, taking the rate to 4.5 per cent.

On Monday, Australia's central bank cut its interest rate by 1 per cent – its biggest single reduction since 1992.