Slide in UK manufacturing output

Manufacturers are finding life harder

UK manufacturing output fell sharply in September, according to official figures, while the global credit squeeze hit the services sector.

Output slid 0.6% on a monthly basis in September and was flat in the third quarter, held back by the strong pound, high interest rates and oil prices.

Services activity slowed to a 53-month low as the global lending crisis affected leading finance institutions.

One analyst said the data strengthened the case for an immediate cut in rates.

Tougher times

Nevertheless, the Bank of England is still thought likely to keep rates on hold at 5.75% when it next meets on Thursday, amid lingering concerns about inflationary pressures.

According to the Office for National Statistics (ONS), manufacturing output weakened across most sectors in September.

Thursday's (MPC) vote could well go right down to the wire Howard Archer, Global Insight

Separate figures showed a less steep 0.4% fall in industrial production - including the mining, quarrying and energy supply sectors - but production was flat in the third quarter, weaker than had been expected.

Manufacturing has enjoyed improved fortunes recently, but the figures suggest the combination of record oil prices, the pound's rise to a 26-year high against the dollar and higher borrowing costs, have begun to bite.

Meanwhile, the PMI survey of service sector activity showed its weakest result since May 2003, with firms less confident about the future than at any time in the past 15 months.

"The survey has factored in the effects of the financial market crisis and, in particular, the fallout from Northern Rock," said Alan Clarke, an analyst with BNP Paribas.

Rates dilemma

The data may influence members of the Bank's Monetary Policy Committee (MPC) as they prepare to gather for their monthly interest rate-setting meeting.

The MPC is already under pressure to follow the US Federal Reserve's lead by cutting interest rates to relieve some of the strain on consumers and businesses from hefty borrowing costs.

"The steady stream of weaker data over the last few days has undeniably boosted the case for a pre-emptive interest rate cut to try and reduce the risk of a sharp UK economic slowdown," said Howard Archer, chief UK economist at Global Insight.

"Thursday's vote could well go right down to the wire."