Manufacturing decline adds to double-dip fears

"Stagnant" British manufacturing has edged further towards renewed recession with the latest and most authoritative survey of business sentiment in the sector suggesting that output may contract in the coming months.

It comes as the official data showed manufacturing output contracted in the second quarter of this year, partly due to disruption to Japanese component supply after the tsunami, but also because of an underlying weakness in demand, especially domestically. Broadly, the economy has been flat for the past nine months.

The Chartered Institute of Purchasing & Supply (Cips) saw its overall reading of sentiment, the Purchasing Managers' Index (PMI), slip to 49.1 in July, down from a revised figure of 51.4 in June. A reliable leading indicator, any PMI reading below 50 points to falling activity in about six to nine months.

The news will add to the pressure on the Bank of England's MonetaryPolicy Committee, which meets this week, to launch another round of "quantitative easing" (QE), the direct injection of money into the economy. Attention at the committee and elsewhere will focus on the Cips's sentiment reading for the services sector – which comprises some 70 per cent of national income, against around 12 per cent in manufacturing. A severe slump in sentiment there, if coupled with the other subdued indicators, might just impel the committee to act.

However, the consensus in the City is that those figures will still be in positive territory and that the Bank will leave rates at the historic low of 0.5 per cent and QE on hold.

David Noble, chief executive at the Cips, said: "Alarm bells are ringing for the UK manufacturing sector, which has seen conditions deteriorate rapidly since the start of the year. In marked contrast from those record highs, weaker consumer demand, sluggishdomestic orders and a conservative approach to inventory holdings are weighing down on the overall health of the sector."

"Unless conditions improve, we may have a real problem on our hands."

The CBI's most recent Industrial Trends survey has already revealed a "darkening mood" among its members firms, with plans to take on workers and investments being placed on hold as demand falters and political uncertainties in the US and the eurozone erode confidence.

Manufacturing employment declined slightly in July, representing a marked turnaround from the survey record jobs growth seen only five months earlier. Backlogs of work continued to fall despite the reduction in staffing levels.

The apparent end of the manufacturing revival will also come as a disappointment to ministers hoping for the much-vaunted "rebalancing" of the economy towards industry. It will add to the calls on the Treasury and the Department for Business to come up with a more convincing "growth strategy" in the autumn.