Manufacturing slump sends hopes of recovery spinning

GLOOM spread over Britain's faltering recovery yesterday as new economic data showed that manufacturing slowed more than expected last month as the growth in new orders slackened.

Sterling fell on the currency markets as economists said the more downbeat picture made it likelier UK interest rates would stay at historic lows for some time yet.

The jitters will be compounded this morning as the CBI's latest survey of the service sector shows profits fell in the past three months as business levels stayed "well below normal".

The CBI figures follow yesterdays's data on manufacturing from the Markit/Chartered Institute of Purchasing and Supply. Its index fell to 54.3 in August, well below all City forecasts, compared with 56.9 in July. Any figure above 50 denotes growth.

Analysts said particularly worrying was a sharp fall in the PMI's new orders index to 52 last month from 58.5 in July.

This was its biggest one-month fall in more than six years. Shehan Mohamed, economist with City consultancy CEBR, said: "The rate of growth for new (manufacturing] orders has fallen to its lowest level since June 2009, when the UK economy was still in the midst of recession."

Brian Hilliard, UK economist at Societe Generale, said: "It's obviously disappointing reading and the troubling part is the big fall in the new orders component."

The PMI survey showed there was a slight pick-up in export orders growth, spotlighting the main reason for the slowdown as weaker domestic demand.

There had been a build-up in stocks that had helped the much-stronger-than-expected 1.2 per cent growth in the UK economy in the second quarter of this year, but was unlikely to last, Tom Vosa, head of market economics at National Australia Bank, said.

"The slowdown in manufacturing output is consistent with that view as firms decide not to increase inventories in order to conserve cash flow," Vosa added.

The darker picture on manufacturing extended across the Channel, with eurozone PMI data showing an index at a six-month low of 55 in August from 56.7 in July.

"Although the August eurozone manufacturing survey still points to a reasonable expansion overall, it is markedly weaker and fuels concerns that the sector is running out of steam," one economist said.

The CBI's latest services survey says profitability has fallen unexpectedly in both consumer services - such as hotels, bars, restaurants and travel - and business and professional services like accountancy, legal and marketing firms.

In consumer services 30 per cent of companies said the value of business fell and 21 per cent said it rose, giving a rounded balance of minus 8 per cent.In consumer services, a negative balance of 13 per cent said the value of business fell in the latest quarter, the survey having been conducted between 28 July and 11 August.

Ian McCafferty, the CBI's chief economic adviser, said the survey showed "households are still reluctant to spend on services", and trading conditions in the sector were likely to remain "patchy" into 2011.

Against this backdrop, the euro rose against the pound yesterday to a three-week high of 83.2p from 83p.