The Confederation of British Industry reported in its monthly survey that home orders were holding up but the nosedive in export orders meant manufacturers were expecting no increase in output over the next four months. Production has already fallen for two quarters running, putting manufacturing officially into recession.
The CBI is still forecasting a soft landing for the economy as a whole, with a gradual slowdown in growth. But Kate Barker, the CBI's chief economic adviser, said: "The key immediate risk is that exports could weaken still further."
She urged the Bank of England not to increase interest rates any further.
This call was put even more strongly by Ken Jackson, general secretary of the AEEU. "The Bank of England must end its vendetta against manufacturing industry," he said, saying the Monetary Policy Committee should indicate that it expected its next move to be a reduction in borrowing costs.
The CBI's monthly survey showed the balance of exporters with order books below rather than above normal was minus 51 per cent, down from an already weak minus 43 per cent in April. This was bad enough to offset reasonable domestic order books, taking the total orders balance to minus 17 per cent, its weakest for nearly two years.
As a result, manufacturers' output expectations weakened further, indicating virtually no growth during the next four months. Optimism about output has returned to its lowest since late 1992, the nadir of the recession. The weak outlook also took price expectations to a record low, suggesting that prices charged at the factory gate could start falling.
Simon Briscoe, an economist at Nikko Europe, said: "Manufacturing is going to be struggling for at least the rest of this year. It does show another interest rate increase is completely out of the question."
The CBI is still predicting that the economy will grow by just over 2 per cent this year and next thanks to strong consumer spending. But this depends on the pound falling significantly.
Sterling weakened slightly during the day but ended virtually unchanged at DM2.90. The currency markets remain hesitant to rule out one final rise in interest rates if pay increases continue to pick up.
Separate figures yesterday from the Nationwide showed a big increase in house prices in May, but the building society said the number of sales was disappointing. The average house price jumped 1.2 per cent in May after a nearly flat April, to a level 11.9 per cent higher than a year earlier.
However, the level of transactions fell. The Nationwide said it was too early to conclude that the recovery had stalled.