Factory output deals a blow to hopes of recovery

Hopes of a recovery in the UK economy after the autumn's "soft patch" were dealt a twin blow yesterday as factory output failed to rebound and a leading think-tank said growth had slowed further last month.

Hopes of a recovery in the UK economy after the autumn's "soft patch" were dealt a twin blow yesterday as factory output failed to rebound and a leading think-tank said growth had slowed further last month.

Manufacturing output rose just 0.1 per cent in September, taking the fall in the third quarter of the year to 1.0 per cent, the Office for National Statistics said. The wider production sector slumped by 1.4 per cent in the three months to September, compared with the 1.1 per cent the ONS said last week when it produced an estimate of 0.4 per cent GDP growth.

Economists said that on its own the fall in production output would cut GDP growth to 0.3 per cent. "This has knocked hopes for an upward revision to the preliminary estimate," Simon Rubinsohn, the chief economist at Gerrard fund managers, said.

The National Institute for Economic and Social Research (NIESR) estimated that GDP grew 0.3 per cent in the three months to October as industry contracted by 1.6 per cent.

The figures supported a growing band of City analysts who believe the next move in interest rates will be a cut as the slowing housing market and surging oil prices suck the impetus out of the economy.

George Buckley, at Deutsche Bank, said: "The soggy state of the UK industrial sector should help stay the Bank's hand over the coming months and supports our view that the next move will be down."

However, others said the fall was driven by the volatile energy and utility sectors, which masked some upbeat signs from the manufacturing sector. The oil and gas industry suffered a 3.8 per cent contraction on the month thanks to North Sea maintenance work, which had to be put off from the summer.

The gain was driven mostly by a rise of 1.5 per cent in the electrical and optical industries in September, echoing the more upbeat picture painted by private sector surveys.

Nick Verdi, a UK economist at Barclays Capital, said: "That suggests manufacturing output will, at the very worst, level off in coming months."

Martin Weale, director of the NIESR, agreed. "We continue to expect the fourth quarter overall will show an improvement."