Weak consumer spending behind slump in factory output

British factories have suffered their sharpest slump in orders from UK customers for two years, according to a gloomy survey of the manufacturing sector published just days ahead of the Bank of England's interest rate decision.

British factories have suffered their sharpest slump in orders from UK customers for two years, according to a gloomy survey of the manufacturing sector published just days ahead of the Bank of England's interest rate decision.

The survey, published by the manufacturing group EEF today, is the latest indication that demand within the UK is slowing rapidly. Although economists are unanimous in expecting no change on Thursday, the survey will add to speculation that the next move will be a cut as soon as August.

The EEF survey showed factory output in the three months to May slowed for the second quarter in a row while new orders suffered their worst fall since spring 2003. The sharpest falls were in sectors closest to the consumer such as electrical equipment and motor vehicles. "Manufacturers could only escape the double impact of a reluctant consumer and a poor eurozone for so long," said Stephen Radley, its chief economist.

Companies cut jobs for the first time in more than a year and shelved plans for investment for the second quarter in a row. Profit margins fell more sharply than the previous quarter.

The EEF slashed its forecasts for growth in manufacturing this year to 1.1 per cent from the 2.6 per cent it pencilled in just three months ago. Mr Radley said: "There has been a change in sentiment across the economy that will need addressing if growth begins to stutter. If we see further evidence of slowing then the case for an interest rate cut will become much stronger although I don't think it has been fully made yet."

All 45 economists surveyed by Reuters said they expected the monetary policy committee to leave rates at 4.75 per cent on 9 June; only 17 saw any change this year. Ross Walker, the UK economist at the Royal Bank of Scotland, said that "monetary policy is on autopilot". Since the MPC said last week that first quarter GDP growth has been revised down, consumer spending growth has slowed to a decade low, industry has moved into recession and retail sales and credit card spending are sluggish.

On the other hand, inflation is near the 2.0 per cent target, employment is at record levels and there has been a rise in the number of mortgage approvals.

Malcolm Barr, the UK economist at JP Morgan, said there are two forces at work. "The first is the weakness of domestic demand and global manufacturing, and the second is in stabilisation in housing turnover and global goods demand, which remains solid. The next three or four months will see which dominates."

Last month, Paul Tucker abandoned his vote for a rate rise, leaving Sir Andrew Large, one of the deputy governors, as the only hawk among the nine members. "The moderation in consumer credit card borrowing in April may be enough to prompt Sir Andrew to retract his call for higher rates to counter households' rapid accumulation of debt," said Capital Economics' chief UK economist, Jonathan Loynes.

A survey of business trends by accountants BDO Stoy Hayward showed a fall in optimism last month. Peter Hemington a partner there, said: "The news following the election has been unpromising. Retail is edging down and the world economy is softening."