Page last updated at 10:40 GMT, Wednesday, 1 October 2008 11:40 UK

UK manufacturing sees sharp fall

Welder at UK factory
Manufacturing has been suffering along with the rest of the UK economy

The UK's manufacturing sector shrank in September at the fastest rate for 17 years, a survey has suggested.

The Chartered Institute of Purchasing and Supply's purchasing managers' index fell to 41 last month, its lowest reading since records began in 1992.

Any reading below 50 indicates a contraction. Domestic demand was particularly weak with clients cancelling orders.

The survey is likely to add to fears that the UK is entering a recession.

Analysts said the weakness of the survey meant that the Bank of England might cut interest rates as early as next week.

Gloomy outlook

Wherever you look in the survey, there is serious weakness
Howard Archer, Global Insight

The figures from CIPS mark the fifth consecutive month of contraction in the manufacturing sector.

September's figure was much lower than expected. August's reading had been 45.3, and analysts had forecast a figure of about 45 for last month.

The new orders and employment indexes were the weakest since 1992, while new export orders showed the sharpest decline in seven years.

"Wherever you look in the survey, there is serious weakness, with output, new orders, and backlogs of work all contracting at the fastest rate in the survey's history," said Howard Archer of Global Insight.

He said the figures might "boost hopes" that the Bank of England might cut interest rates from 5% to 4.75% as soon as next week.

BNP Paribas analyst Alan Clarke said he was surprised at the rate of the fall.

"If this weakness is echoed in the services PMI later this week, it is screaming out for a rate cut at the October meeting," he said.

The Monetary Policy Committee (MPC) has held rates unchanged at 5% since April in an attempt to keep inflation under control. The latest price data showed CPI inflation stood at 4.7% in August, more than double the 2% target.

'Little respite'

The latest CIPS survey highlights the difficulties that British manufacturers are facing in the challenging economic conditions.

The consumer goods sector was the worst hit, with output and new orders down sharply.

The Output Index fell from 47.6 to 41.2, with manufacturers attributing the drop to lower volumes of new business.

The increasingly tough economic environment together with problems in the credit market led to clients cancelling or postponing new agreements.

"Given the unprecedented chaos in global economies, there was little respite for UK manufacturers in September," said Roy Ayliffe, CIPS's director of professional practice.

Firms had begun to lay-off non-essential staff, the survey found, and there was also a trend towards not filling vacated positions and postponing expansion plans.

One positive point was that the benefits of the falling price of oil and other commodities had begun to trickle through, with input cost inflation reaching to a seven-month low.

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