'Zero growth best we can hope for' in 2nd quarter

The prices of goods leaving Britain's factories hit their highest since October 2008, heaping further pressure on consumers, while weak construction data added to fears of a slowdown.

The latest worrying figures coincided with US job figures at the lower end of expectations, underscoring fears about a weakening economy and the need for further injections of capital from the Federal Reserve.

On Thursday, the Bank of England kept interest rates at a record low of 0.5 per cent amid persistent growth concerns, but evidence of growing price pressures will also be a worry at a time when consumer price inflation is already more than double the central bank's target.

The Office for National Statistics yesterday said overall producer output inflation rose to an annual rate of 5.7 per cent last month - a 32-month high and just above the 5.6 per cent forecast.

Core factory gate inflation, which excludes food, drinks and petrol, dipped year-on-year from 3.4 per cent to 3.2 per cent, providing some relief for central bank rate-setters.

However, non-seasonally adjusted construction figures showed that output in the sector grew by just 0.4 per cent in May after a hefty 12.4 per cent drop in April caused by disruption due to the royal wedding.

Alan Clarke, an economist at Scotia Capital, said: "There's a significant chance of a negative GDP reading in the second quarter. Zero growth is probably the best we can hope for."

His comments came a day after think-tank the National Institute of Economic and Social Research estimated that GDP grew by just 0.1 per cent in the second quarter. Others have pencilled in quarterly growth of 0.3 per cent following a 0.5 per cent gain in the opening three months of the year.

The unexpected rise in the annual rate of producer output inflation came despite a small month-on-month increase of just 0.1 per cent, as the year-on-year figures were elevated by weak producer prices in June 2010.

Howard Archer, chief UK economist at IHS Global Insight, said the latest headline inflation number had been distorted by a dip in prices last June.

"While the producer price inflation figures do not make great reading, there are nevertheless hints that manufacturers are becoming more circumspect in raising their prices," he said.

"This is likely a reflection of manufacturing activity clearly shifting down a gear in recent months. The surge in input prices has also abated recently and eased pressure on manufacturers to hike their prices, although there was a modest renewed rise in input prices in June."

Peter Dixon, an economist at Commerzbank, added: "It's fair to say that if you look at the trend, things are getting slightly better in terms of the monthly rates of change.

"But the increase in input prices is something of a worry and could yet feed into higher consumer price inflation in the months to come."