Quantitative easing case strengthened as manufacturing falters

Concerns over the recovery in Britain's manufacturing sector intensified yesterday after it emerged that growth fell to a ten-month low last month.

The data, in the latest sector snapshot from the Chartered Institute of Purchasing and Supply (Cips), will also strengthen the case for further quantitative easing (QE) as fears of a double-digit downturn grow.

The report's main activity index, where a figure more than 50 indicates growth, slipped to 53.4 in September - the lowest since last November. The forecast had been 53.8.

Cips downgraded its estimate on activity in August to 53.7 from the 54.3 it previously reported.

Worryingly, the survey found that weaker demand from the consumer goods sector contributed to the first decline in export orders since July 2009.

While there was little market reaction to the figures, analysts said they provided further evidence that the UK's economic recovery following the worst recession for 60 years was losing steam.

Howard Archer, chief UK economist at IHS Global Insight, the forecasting group, said: "While the survey still indicates clear expanding manufacturing activity, it nevertheless points to a significant loss of momentum from the peak level seen in the second quarter. This makes it a stone-dead certainty that the Bank of England will keep interest rates down at 0.5 per cent at the conclusion of its October (meeting] on Thursday. It also maintains pressure on the Bank to consider reviving quantitative easing."

Vicky Redwood at Capital Economics added: "(The Cips] survey adds to other evidence suggesting that the economic recovery is fading fast."

Earlier this week, monetary policy committee member Adam Posen said the central bank might need to restart its QE programme to pump money into the economy, though most analysts reckon he will have difficulty winning over other policymakers as inflation is still high.

The Cips purchasing managers' survey showed actual output fell back to grow at its slowest pace since last September while the employment index also fell to stand barely above the 50 level that separates expansion from contraction.

Rob Dobson, senior economist at Markit, co-author of the report, said: "More worrying is the order book trend.This suggests that the slowdown in production has further to run."

The new orders index improved by almost two points, but the export orders index fell below 50 to show foreign demand declining for the first time since July 2009, despite the weak pound.

Markit said purchasing managers had reported a drop in demand from clients in mainland Europe, the US and Russia.

The prospect of a pick-up in exports is looking increasingly uncertain as key trading partners in Europe and further afield grapple with sweeping public spending cuts.

Most economists expect Britain's surprisingly robust 1.2 per cent growth between April and June to mark a peak for now. A number of think-tanks have downgraded their growth forecasts for 2011.

l The pace of growth in the US manufacturing sector slowed in September, an industry report yesterday showed, while employment levels also declined.

Strong growth in the industrial sector has helped lift the country out of recession.