Manufacturers cut staffing and investment as orders hit a three-year low

New orders for the UK's industrial output have slumped to a three-year low as a "winter of economic discontent" looms, and manufacturers are pulling back on staffing and investment in the face of increasingly gloomy predictions.

Despite yet another quarter of double-digit growth for industrial output, the 12th in a row, the stagnant economy and deteriorating eurozone are starting to be felt, according to a survey by EEF, the manufacturers' organisation, and the accountancy Grant Thornton.

The balance on orders is down by 11 points, largely due to a 13 per cent drop in domestic orders, and margins are being squeezed by rising energy costs, the report found. After more than a year of job creation, the majority of companies are now cutting staff rather than hiring more.

Steve Radley, the chief economist of EEF, said: "Manufacturing has shown considerable resilience in the face of a credit crunch, a global economic slowdown and a massive increase in its costs. But there are now clear signs that these pressures are starting to take their toll on companies."

In response to weakening demand, manufacturers' planned capital expenditure has also turned negative, as five out of the seven engineering sectors reported lower output compared with the previous quarter. Basic metals and electrical equipment are the worst-affected, down by one and three percentage points respectively.

The prognosis for the next three months is grim. The forward-looking output balance is down from 15 per cent to minus 5 per cent, and the total orders balance is down from 14 per cent to minus 8 per cent.

Industry needs government to do its bit to ease the situation, Mr Radley said.

"Given the Bank of England's hands remain tied in the short term, it is now essential the Government tackles this turning point for the economy head on," he said. "It must avoid adding any further costs to business and put in place policies which will provide the building blocks for an upturn."

Bob Hale, head of manufacturing at Grant Thornton, said: "The majority of manufacturers will now be part of the chorus calling for new government initiatives to support the sector, as any respite will now be welcome in what is likely to be a winter of economic discontent.

"UK manufacturing has looked to its export markets for buoyancy this year, but it seems many of the key markets we export to, particularly in Europe, are now coming down with the same malaise afflicting both the US and the UK."