Manufacturing output suffers steepest fall in nearly 30 years

The recession in the manufacturing sector deepened today after official figures showed output suffered its steepest annual decline in almost 30 years.

November's year-on-year decline of 7.4 per cent was the worst performance since June 1981, according to the Office for National Statistics (ONS).

The figures shocked analysts, outstripping even the most pessimistic forecasts.

Manufacturers have been hit as the banking crisis and economic downturn causes deteriorating domestic demand and difficult credit conditions.

Sterling's hefty falls against the euro and dollar should have proved beneficial to manufacturers, but this has been largely offset by the sharp declines in demand from key markets like the eurozone and US.

Paul Dales, of Capital Economics, said the figures were "simply awful" and warned output was likely to continue to fall despite the weaker pound.

He said: "It can't be long before this forces firms to reduce their selling prices significantly. It's not a good time to be in industry."

Manufacturing activity plummeted 2.9 per cent between October and November, the biggest monthly dip since July 1985, when the disruption caused by the reorganisation of bank holidays for the Queen's Golden Jubilee in June 2002 is excluded.

Overall industrial production, which also includes the mining and utility sectors, fell 2.3 per cent between October and November as the fall-out from the banking crisis hit.

Declines were deeply felt across almost all manufacturing sectors, with the transport equipment industry again feeling the strain. Output from firms making vehicle bodies and parts was more than 18 per cent below the previous year in the three months to November.

Carmakers have been particularly hit by the downturn in spending as consumers look to postpone large discretionary purchases.

Yesterday, Nissan UK blamed the economic crisis for its decision to axe 1,200 jobs at the UK's biggest motor plant in Sunderland, almost a quarter of the 5,000-strong workforce.

And in a sign that the slump in the housing market is taking its toll on related industries, manufacturers of bricks, cement and plaster saw output plunge almost 26 per cent below 2007 rates in the three-month period.

This comes after data showed activity in the UK construction sector had suffered its weakest performance in at least 11 years in December. The Chartered Institute of Purchasing and Supply's (CIPS) Construction Purchasing Managers' Index, which measures overall activity, registered 29.3, the 10th monthly reading in a row below the growth mark of 50.

The Centre for Economics and Business Research (CEBR) said the sector was in "freefall" and called for Government to prioritise stimulating bank lending.

Economist Benjamin Williamson warned future cuts in interest rates would have increasingly less effect, although he added the Bank of England's 3.5 per cent reduction in borrowing costs in the last four months would take some time to filter through.

Manufacturers have responded with disappointment to the Bank's decision to cut rates by 0.5 per cent to 1.5 per cent - the lowest since the Bank was founded in 1694.

The rate reductions come as the Bank's Monetary Policy Committee (MPC) struggles to steer official inflation towards 2 per cent.

It is currently well above target at 4.1 per cent, but is expected to nose-dive as prices tumble with lower demand in a recession, while moves such as the Government's VAT cut add to the downward pressure.

The MPC has warned UK output could fall further in early 2009 as the world economy suffered an "unusually sharp and synchronised" downturn.

But it said a "considerable stimulus" would come from steep rate cuts, along with Government spending plans, the fall in sterling and lower inflation.

Borrowing costs are forecast to reach near zero in the coming months and experts predict the Bank may have to turn to other methods such as "quantitative easing" - boosting the money supply - to help the economy.

The Government is hoping its planned £40bn public spending programme for 2009 will restore growth and create 100,000 jobs.

Today's output figures come at the same time as factory gate prices appeared to be stabilising, with the ONS price index flat between November and December, ending four straight months of falls.

This was after a 4.3 per cent drop in the cost of petrol products was offset by a 3 per cent rise in tobacco and alcohol prices.

The annual rate of output price inflation was up 4.7 per cent in December, compared with 5.1 per cent the previous month.

Petroleum product prices dropped by 7.4 per cent in the year to December, the highest rate of annual decline since October 2006, the ONS said.

The falls came after the cost of oil dived to less than a third of the record $147 a barrel reached last July.