Recession signalled by key indicators of British economy

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Manufacturing and services – comprising almost all of the components of the British economy – are now in recession, according to the latest figures, with a further slump in consumer confidence adding to fears that the slowdown could turn into a slump.

Industrial production fell by 0.8 per cent during the second quarter, the Office for National Statistics reported yesterday, extending the 0.6 per cent decline recorded in the pervious three months. Perhaps reflecting the recent rapid increase in food costs and decline in leisure spending, output in the food, drink and tobacco industries fell especially sharply, by 1.6 per cent.

A small rise in textile output was the only bright spot in a broadly grim picture. It would appear that even the 12 per cent depreciation in sterling since last autumn has not yet been sufficient to see a boost to orders from exports, thanks to slower growth in the eurozone and in the United States. The outlook for the service sector, meanwhile, is hardly brighter.

The latest survey of sentiment from the Chartered Institution for Purchasing and Supply (Cips) did show a slight improvement on June, but July's reading in the key Purchasing Managers' Index, at 47.4, was scarcely up (any number below 50 indicating a fall in activity). Cips' polling is a reliable leading indicator of trends in the economy, and the institution's manufacturing and construction surveys also show sustained weakness, as do the official data on output. Roy Ayliffe, the director of professional practice at Cips, said: "Managers saw the clouds of pessimism gather as providers continued to struggle with further record falls in new work and soaring food, fuel and utility prices. July was marked by contraction – particularly in financial services and hotels and restaurants – and trimming of jobs, as it became increasingly difficult to protect margins from the prevailing economic forces."

Many economists believe that a full-blown recession is becoming more likely, and most judge that the Bank of England will leave interest rates on hold at 5 per cent when the Monetary Policy Committee announces its decision at noon tomorrow.

Meanwhile, the Nationwide Consumer Confidence Index saw its largest recorded falls during July; 18 per cent lower than this time last month and 46 per cent lower than a year ago. More gloomy economic news, further falls in house prices, news of job losses and the squeeze on household budgets from the credit crunch and the commodities boom contributed to the substantial rise in pessimism. Sentiment about the future employment situation weakened in July, probably brought on by recent news of redundancies in the construction and financial sectors.

There may be worse to come. July's Report on Jobs, from the Recruitment and Employment Confederation and accountants KPMG, signalled a continuation of the recent downturn in the labour market. Permanent placements fell at the fastest rate since December 2001, while growth of temp billings was the weakest for more than five years.