Manufacturing industry slumps back into recession

Estimates of economic growth in the first few months of this year may be cut to zero later this month after official figures showed that manufacturing had plunged back into recession. Factory output fell by 0.4 per cent in March while early estimates of a mini-boom in manufacturing in the previous two months were too upbeat, the Office for National Statistics said.

Estimates of economic growth in the first few months of this year may be cut to zero later this month after official figures showed that manufacturing had plunged back into recession. Factory output fell by 0.4 per cent in March while early estimates of a mini-boom in manufacturing in the previous two months were too upbeat, the Office for National Statistics said.

This meant the sector contracted by 0.1 per cent rather than the estimate of a "small rise" the ONS used when it put together its first estimate of 0.2 per cent growth for GDP in the first quarter. Although manufacturing makes up only a fifth of the economy, it could push GDP to a decade-low of 0.1 per cent for the quarter or even zero. The next revision is on 23 May. This would cast fresh doubt on the optimistic forecast of annual growth of between 2 and 2.5 per cent unveiled by the Chancellor, Gordon Brown, in the Budget.

David Page, a UK economist at City bank Investec, said the manufacturing slump, combined with a larger than expected fall in the wider production sector that includes energy, would cut GDP to 0.1 per cent. "We doubt the likelihood of any immediate reversal of this decline in the second quarter," he said. "The fact that manufacturing and GDP are likely to be worse than expected clearly furthers arguments for additional rate cuts."

The ONS confirmed that the Bank's monetary policy committee was handed the manufacturing data before Thursday's decision not to cut rates.

Steve Radley, the chief economist at the Engineering Employers' Federation, said: "With the economy flirting with stagnation, it is even more difficult to understand why the Bank did not cut rates."

The National Institute of Economic and Social Research, the independent think tank, said there was little sign of economic recovery. It said GDP grew by 0.2 per cent in the three months to April, implying there was little sign of a "Baghdad bounce" after the Iraqi conflict. It said the figures confirmed a "general impression of economic weakness and reinforce the argument that an interest rate reduction yesterday would have been a sensible precaution against continuing slow growth".

The ONS described the fall in manufacturing as "widespread" with 10 of the 13 sub-sectors suffering a decline in output. The most significant fall was a 2.6 per cent drop in electrical and optical equipment – the once rising star of manufacturing that includes mobile phones, semi-conductors and computers.

Meanwhile, previous estimates of 0.2 per cent growth in January and 0.3 per cent in February were both revised down to just 0.1 per cent.

Jonathan Loynes, the chief UK economist at Capital Economics, said: "Signs of a tentative recovery in the manufacturing sector in recent months were just an illusion." He said there was no reason to assume the Bank would cut rates in June as it had known about the manufacturing figures when it took its decision.

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