Page last updated at 10:15 GMT, Friday, 1 August 2008 11:15 UK

Rising costs hit UK manufacturers

The production line at the BMW plant in Cowley, Oxford
Manufacturers are cutting jobs to cope with financial pressures

UK manufacturing activity shrunk in July by the fastest rate in almost a decade as firms struggled with higher costs and lower orders, figures show.

The Chartered Institute of Purchasing and Supply/MARKIT said that its purchasing managers' index dropped to 44.3 last month from 45.9 in June.

It is the third month in a row that the index has fallen below 50, a level below which indicates contraction.

The figures raise fresh fears that the UK could dip into a recession.

CIPS said record cost inflation, and the largest drop in new business in nine and a half years, were taking its toll on the sector.

"Shortages of raw materials - in addition to weaker demand - were a worrying factor behind the further fall in manufacturing output in July," said Roy Ayliffe, CIPS's director of professional practice.

Wider problem

Firms cited weaker domestic and foreign demand, despite the fall in value of sterling against other major currencies over the past few months which might have been expected to boost exports.

To cope with the problems, firms cut jobs at the highest rate since late 2001.

The construction industry and service sector are also under pressure, with recent figures from the Office for National Statistics (ONS) showing that they are also on the wane.

Low growth

The fall in output helped drag down UK growth in the second quarter of the year, with the economy growing by just 0.2% - the lowest quarter-on-quarter growth in three years.

But with manufacturers raising prices to record levels to cope with record input costs, the Bank of England may struggle to cut interest rates below their current level of 5% to offer relief to consumers and businesses.

"Softening demand and surging costs have severely hurt profitability in the sector and this is applying a serious brake on activity," said Alan Clark at BNP Paribas.

"The net result is likely to be that the drag on the PMI surveys continues in the months ahead."

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