New year gloom grips UK as high street, industry and factories slow

Hopes for a strong economic recovery this year were dealt a blow yesterday by a raft of figures showing 2005 ended amid lacklustre conditions across industry, the high street and the housing market.

Factory bosses cut jobs last month as growth in new orders from abroad slowed and their cost bill escalated to a nine-month high, an industry snapshot showed.

Shopper numbers in the first week of the Christmas sales period fell "markedly", while August's cut in interest rates failed to spark a revival in people borrowing against the value of their homes to fund spending. The figures will add to pressure on the Bank of England's Monetary Policy Committee to cut rates again when it meets next week.

"Neither industry nor household spending looks set to support activity in 2006," Paul Dales, at Capital Economics, said. "We expect rates to fall to at least 4 per cent this year."

A survey of 620 manufacturers by the Chartered Institute of Purchasing and Supply (Cips) found the sector remained "relatively subdued".

Its index of activity rose slightly to 51.1 on a scale where a number greater than 50 denotes expansion. The rise was centred on an increase in domestic orders. However export orders slowed despite the revival in the eurozone economy, and output slowed while job numbers fell again.

Roy Ayliffe, at Cips, said: "The year ended on a disappointing note for manufacturers. Staffing levels continued to fall sharply as employers slimmed down their workforces to save on labour costs."

The Treasury forecasts growth of between 1 and 1.5 per cent in manufacturing this year after 2005's 0.25 per cent contraction. However the average City outlook is for just 0.8 per cent.

John Butler, at HSBC, said: "The UK industrial sector continues to under-perform the global recovery, perhaps because the key area of strength is the production of capital goods, an area the UK has little exposure to."

This was echoed by eurozone figures showing manufacturing grew at its fastest pace in 16 months in December, while German unemployment dropped the most in more than 15 years.

There was little sign that consumers were likely to take up the slack. Mortgage equity withdrawal - loans for uses other than buying a home - dipped in the third quarter of last year. MEW fell 17 per cent from the previous quarter, dropping to £8.3bn from £10.0bn. As a share of post-tax income it fell to 3.9 from 4.8 per cent.

"The numbers provide further evidence of the more cautious approach of homeowners," Simon Rubinsohn, at the fund managers Gerrard, said. "It appears a step down in borrowing compared with 2004 is clearly in place."

The first estimates of post-Christmas shopping activity showed steep falls in visitor numbers to the UK shopping centres. SPSL, the retail traffic analyst, said numbers for the week beginning Sunday 25 December were 7.8 per cent down on the equivalent week in 2004, although this was distorted by the timing of Christmas.

The rival monitor group FootFall said the number of people hitting the shops between 26 and 30 December fell by 12.4 per cent on 2004.