Nissan to slash output at flagship car plant in Sunderland

Nissan is to halt production of Micra cars at its flagship Sunderland factory for several weeks as the Japanese auto giant becomes the latest manufacturer to slash production.

The move, the latest sign of the credit crisis making its presence felt in the "real economy", comes as evidence mounts that the economy is heading inexorably towards recession.

Public sector borrowing is running at record levels – some 75 per cent above where it was this time last year and around 50 per cent above the targets set by the Chancellor in his Budget in March. Analysts say it could reach £100bn a year by 2010 – the worst since the Second World War.

Nissan has cut production at its Sunderland factory until Christmas, making it the third car maker in recent weeks to scale back to avoid stockpiling. The company will stop all building of the Micra and Note models for two weeks at the end of October, to be followed by another three weeks of short shifts. No permanent staff will be made redundant but some temporary contracts will be cancelled.

The plans constitute a 10 per cent reduction in output for the production line over the year to March. "There is an industry-wide problem," a spokes-man said. "The problem is that inventory is too high, and looking ahead that demand is not going to come back in the short term."

Nissan is joining a growing list. At the end of last month Jaguar/Land Rover announced that, after non-production days at three plants over the summer, it planned to stall production for a week at Halewood, Merseyside, at the end of October. In August, Ford announced it would not be renewing 124 short-term staff contracts at its Transit factory in Southampton because of the "softening UK market". With unemployment set to reach two million by Christmas and a sharp decline in projected tax revenues, it is no surprise that government borrowing is soaring. Ministers seem resigned to this, and indeed have signalled their willingness to allow the deficit to worsen still further by bringing forward major public projects such as Crossrail and the 2012 Olympics.

Nor is there much sign of the gloom lifting in the housing market. Mortgage lending slumped to its lowest level for more than three-and-a-half years during September as the stagnant housing market throttled demand. Banks and building societies loaned £17.7bn in September, down 42 per cent from the same month last year. It was the lowest figure for September since 2001, the Council of Mortgage lenders said.

Stamp duties on rising property values were a useful source of income for the Government during the bubble; they are now grinding to a halt, about £2bn down so far this year.

However, the speed of the deterioration in the public finances has shocked some observers. Gemma Tetlow, of the independent Institute for Fiscal Studies, was sharply critical of the Government: "If the Government had acted earlier to address its repeatedly optimistic forecasts for the public finances, we would not now be embarking on a recession with public sector borrowing and debt as high as they are."

Howard Archer, UK economist at Global Insight, said: "The September public finances were dreadful, deteriorating even more than expected. This highlights the extremely poor state of the public finances."

Against an estimate of £43bn in the March Budget for this year's public deficit, most economists yesterday predicted a shortfall of £60 to £65bn for this fiscal year. Capital Economics warned: "The triple whammy of the downturn, the recapitalisation of the banks and the Chancellor's plans to frontload public spending is set to push borrowing to alarmingly high levels ... We think that borrowing will surpass £100bn in 2010/11.

"The higher public borrowing goes now, the larger the eventual fiscal consolidation will need to be. Tax rises and/or spending cuts will restrain the eventual economic recovery, underlining the need for a prolonged period of very low interest rates."

At 4.5 per cent now and an estimated six per cent of GDP next year, soon annual government borrowing may exceed crisis levels reached in 1975/76 (7 per cent of GDP) and 1993/94 (7.8 per cent of GDP.

Taken together, public sector net debt as a proportion of GDP seems set to easily exceed the Government's self- imposed "sustainable investment rule" of 40 per cent, the Maastricht Treaty ceiling of 60 per cent and may even return to the levels of the 1960s and 1970s, when successive sterling crises blew British governments off course.

If all of the liabilities of the 50 per cent state-owned Royal Bank of Scotland are thrown in, then the British nation debt may even break the record set in 1946, when it hit 262 per cent of GDP.