The biggest drop in business optimism since Britain tumbled out of the European exchange rate mechanism in 1992 confirms the slowdown in manufacturing, according to a Confederation of British Industry survey.
Andrew Buxton, chairman of the CBI's economic affairs committee, said: "The slowdown in growth indicated by the survey result is a warning signal."
The quarterly survey of industrial trends in manufacturing showed the balance of firms reporting higher output was the lowest for two years. New orders also increased at their slowest rate for two years. Investment intentions have fallen since last quarter.
However, Mr Buxton cautioned against over-reaction: "We are certainly not talking about a recession." Output and orders were still rising, with growing exports off-setting the dip in home demand. The conditions for sustained recovery were still in place, he said.
The CBI would nevertheless like base rates to fall after the Budget. "We do not want a Budget that cuts taxes so much it puts upward pressure on interest rates," Mr Buxton said.
Andrew Smith, the Shadow chief secretary to the Treasury, said: "The fact that the CBI survey shows businesses scaling back on investment suggests that the sustainability of the recovery will be hit."
The survey showed confidence has fallen for the second quarter in a row, with an especially sharp dip in big companies' optimism. The balance of firms reporting more optimism over those feeling less optimistic was minus 11, compared with plus 13 six months ago.
The sharp fall in corporate feel-good reflects slower growth in export orders and a fall in domestic orders - both lower than the expectations reported in the last CBI survey.
Total new orders have increased at the slowest rate for two years. A positive balance of 11 per cent of firms reported higher export orders, down from record levels set earlier this year, and a negative balance of minus 3 per cent in the case of domestic orders.
Plans to invest in new plant and equipment remain positive, but have fallen back. A positive balance of 12 per cent of firms intend to spend more in the year ahead, down from 17 per cent in July. Ian Shepherdson, an economist at HSBC Markets, said it was disappointing to see falling investment expectations.
Levels of stocks increased for the second quarter running. Mr Buxton said a stocks build-up could depress output in future. Employment in manufacturing rose slightly during the past three months, the first increase reported since mid-1989. However, companies expect the long-term fall in employment to resume over the coming four months.
The survey brought better news on prices which rose at the slowest rate for a year, and by less than expected. The balance of firms that raised prices over those that cut them fell to 9 per cent from much higher levels earlier in the year.
The weaker-than-expected results led some City analysts to revive the case for lower base rates. Simon Briscoe, at Nikko Europe, said: "The Bank of England will be hard-pressed to whip up inflation worries after this survey. The case has now been made for policy-easing over the next year."
The gilts market reacted favourably to the weak CBI survey, closing slightly higher. But trading was quiet in advance of today's pounds 3bn auction.Reuse content