Gloomy future looms as manufacturing hits a dip

A sharp slowdown in domestic and export demand has pushed business sentiment in the manufacturing sector to its lowest level since the recession's depths in September 2009.

While it does not necessarily herald a "double dip" recession it does suggest that the economy is set for a prolonged period of stagnation. As the Bank of England prepares for its next interest rate move next week, it also increases the chances that the Bank will opt for a further round of "quantitative easing", the direct injection of money into the economy to boost demand. Sterling slid on the prospect of another increase in the money supply.

The Chartered Institute for Purchasing and Supply's latest survey of managers at the sharp end shows the economy's rebalancing is the latest clear signal that the manufacturing revival, which has led the recovery, is starting to lose much of its momentum.

Fragile consumer confidence at home – confirmed this week in polls – and the crisis in the eurozone are depressing manufacturing output here and across the EU. Other major world economics powers such as the US and China are also seeing a slowdown in growth, while natural disasters in Japan also threatening a relapse into recession there.

June's overall reading of 51.3 in the purchasing managers' index was below expectations of 52.3 and the weakest since September 2009. It has now lost a remarkable 10 points in the past four months. Any reading above 50 indicates expansion, and the current output index rose from 50 in May to 52.7. B ut this reversed less than half of the previous month's fall and left the index still pointing to a sharp slowdown.

The export orders index dropped from 52.7 to 50.7 and there was also a ominous decline in the employment indices, suggesting job creation may also stutter.

The Cips surveys, conducted by the Markit research company, are usually a reliable leading indicator of future trends in the economy. Rob Dobson, senior economist at Markit, said: "The manufacturing sector continued to slip closer to stagnation in June. With strong headwinds already in place and austerity measures likely to put increasingly counteractive pressure on domestic and consumer demand, it looks as if manufacturing has entered a slower growth phase which could be with us for some time."

He added: "On a brighter note, input price and supply-chain pressures eased noticeably in June, which will be a welcome development for manufacturers and will also add weight to the Bank of England's monetary belief that the current spike in inflationary pressures will prove transitory."

Attention will be focused on the survey of service sector activity released on Tuesday, ahead of the meeting of the next Monetary Policy Committee decision on Thursday. Services comprise some 70 per cent of GDP; manufacturing only about 12 per cent. Senior Bank policymakers, including the Governor, Sir Mervyn King, have been making "doveish" noises about extending QE in recent days, as the evidence of a stalling recovery has accumulated.

If they do decide to ease policy it will come as some relief to the Chancellor, George Osborne, whose borrowing forecasts will be under strain of the economy continues to underperform.