Industry braced for worst crisis since early 1990s

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The Independent Online

Britain's manufacturing sector will today be declared officially to have plunged into recession if figures for June published later this morning show that it has suffered six straight months of falling output.

The news will confirm what business groups, company executives and analysts have been saying for weeks – that manufacturing is enduring its worst crisis since the early 1990s.

It is likely that the Bank of England's Monetary Policy Committee had had sight of the data when it took its decision to lop a quarter-point off the base rate last Thursday.

In its statement, it highlighted the pain being suffered by industry as one reason for the cut.

The Bank's deputy governor, Mervyn King, is expected to explain the MPC's reasoning in more detail when he publishes the Bank's quarterly inflation report on Wednesday.

According to a poll of economists in the City, industrial output – which includes oil, gas and utilities as well as factory production – fell by 0.1 per cent in June to leave it 2.3 per cent lower than a year ago.

Although manufacturing output is forecast to have been flat, it would require monthly growth of some 0.9 per cent to save it from recording two quarters of negative growth – the technical definition of a recession.

The news is in line with surveys from the CBI, the British Chambers of Commerce and the Engineering Employers' Federation, all of whom said manufacturing had been hit by a double-whammy of a slump in demand for hi-tech goods in the wake of the US slump and the strength of the pound against the euro, making its goods pricier in its main export market.

John Butler, the UK economist at HSBC, said: "Part of this recent fall in manufacturing output is attributed to the weakening of the 'new economy' industries. Falling global demand and the high level of sterling implies the downward pressure in this sector will persist into the third quarter."

While manufacturing makes up little more than a fifth of the economy, the real question is whether the recession there will spread into the services sector, which makes up two-thirds.

Construction, which makes up 5 per cent, is enjoying a boom, while agriculture, which makes up less than 2 per cent, has been hit by the foot-and-mouth outbreak.

Figures on Friday from the Chartered Institute of Purchasing and Supply showed that growth in the private-sector service industries had all but ground to a halt in July.

Although firms remained on balance optimistic about future activity levels, the measure of actual new business showed negligible growth, suggesting the downturn may not yet have bottomed out.