The CBI reported that manufacturers' expectations for their output in the next four months were the most depressed since November 1992. Export orders were at their weakest since January 1983.
Sudhir Junankar, the CBI's head of economic analysis, said the survey results showed that "the manufacturing recession is certainly on the way".
Concerns for exporters in particular were compounded by events on the currency markets yesterday. The pound gained around 2 pfennigs against the German mark and is once again threatening to break through the 3- mark barrier. Against the dollar it gained over a cent. Its value measured by the Bank of England's trade-weighted index closed at 106.7, its highest level since 3 July.
The industrial weakness revealed by the CBI, and the organisation's call for an immediate cut in interest rates, initially depressed sterling on the foreign exchanges. But the pound soon resumed its recent upward momentum, boosted by global uncertainties
"The pound is rising strongly once again on the grounds that it is the most obvious safe haven," said Adam Cole, economist at HSBC Securities. "The dollar is being affected by worries about Latin America, the yen is depressed by events in east Asia, and the mark is under pressure because of Eastern Europe."
The CBI monthly survey was conducted between 28 July and 19 August, before the latest bout of market turmoil. Since then, the pound has gained 7 pfennigs and 2 cents.
Questioned about their output expectations, 32 per cent of manufacturers said production would fall, while 17 per cent expected a rise. The negative balance of 15 per cent was sharply worse than a negative 8 per cent in July. A year ago the survey showed a positive balance of 16 per cent.
The survey also found 60 per cent reporting that their export orders were below normal, with only 9 per cent reporting above-normal demand. As would be expected, there was a sharp rise in the number of firms saying that their level of stocks was more than adequate.
While warning about the downturn in manufacturing, the CBI is not yet forecasting a recession for the economy as a whole. It still sees a growth of sorts for next year.
Kate Barker, the CBI's chief economic adviser, said: "We have sharply downgraded our forecasts for the next 18 months. We now expect that economic growth over the next three quarters will almost grind to a halt in the UK. So we believe that an early cut in interest rates is vital to help prevent the economy slipping further than necessary, while still hitting the Government's inflation target."
The CBI's forecasts showed GDP growth next year of 1.2 per cent, with manufacturing output flat. Manufacturing investment is set to drop 5.8 per cent, but government spending is expected to rise by 3 per cent. Inflation is expected to be on target at 2.5 per cent by the end of next year. Despite the depressed outlook, unemployment is forecast to rise only modestly from 1,780,000 this year to 1,910,000 next.