Osborne to brief MPs as factory data adds to economic gloom

The NIESR thinks growth in the UK has totalled just 0.6 per cent over the whole of the past 12 months
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Chancellor George Osborne will use tomorrow's recall of Parliament over the riots to brief MPs on Britain's increasingly fragile economic recovery amid further data that suggests growth is faltering.

Mr Osborne will make a statement and answer questions in the House of Commons, after a week of stock market gyrations following the US credit rating downgrade and ongoing concerns over the eurozone debt crisis. The latest evidence on the performance of the domestic economy yesterday was also downbeat, with official data showing a shock contraction in manufacturing output in June.

The Chancellor faces a growing challenge to defend the £80bn of cuts the Government says are needed to bring the overweening public debt back into line. Mr Osborne faces calls to produce a convincing plan for boosting econ- omic growth, after the most recent GDP figures showed an anaemic 0.2 expansion in the second quarter, prompting warnings of a "bumpy and uneven recovery" from the International Monetary Fund.

The Office of National Statistics'production index will not help the Chancellor. The figures published yesterday reveal a slide in Britain's manufacturing industries, which have so far led the economy's recovery from the 2008 banking crisis. Manufacturing output was down by 0.4 per cent in June, the ONS said, confounding expectations of a 0.2 per cent rise and taking output down by 2.1 per cent over the year since June 2010.

The June figures add up to a 1.6 per cent quarter-on-quarter contraction – suggesting performance may have been worse than was estimated in the national accounts, and raising the possibility that the second-quarter GDP figure could even be revised still further downwards.

The outlook for Britain's manufacturers is no cheerier. The most recent survey evidence from both manufacturing purchasing managers and the Confederation of British Industry suggests further contractions to come.

Howard Archer, the chief economist at IHS Global Insight, said: "Although manufacturing output only accounts for 12.8 per cent of GDP, it was the economy's best-performing sector in 2010 and early 2011, so its recent marked falling away is of significant concern."

The Bank of England's latest Inflation Report – which will include inflation and GDP forecasts – is unlikely to offer much succour when it is published this morning.

The widely respected think tank, the National Institute of Economic and Social Research (NIESR), said yesterday it believed GDP growth had totalled 0.6 per cent over the three months to the end of July.

However, the NIESR warned that "special factors continue to exert their influence" – namely that the drop in output in April, thanks to the disruption of the royal wedding and the Japanese tsunami, is flattering the rate of expansion.

"Underlying growth is significantly weaker than the headline number reported," the think-tank added. "The level of GDP is now only 0.6 per cent higher than a year ago."

The direction of the trend is also a concern. Although economists counsel against paying too much attention to shifts from one month to the next, it is notable that the NIESR's estimates for GDP in July show a second consecutive monthly fall, with the totals having been pulled down by a sharp drop in industrial output.