George Osborne's 'march of the makers' hits early roadblock

The Chancellor's hopes for a manufacturing-led recovery were hit yesterday by new figures from the Office for National Statistics. The ONS's index of manufacturing production was 0.3 per cent lower in August than in July. The 0.1 per cent growth previously registered by the ONS for July was also revised down to a 0.2 per cent fall.

The largest contributor to August's fall in manufacturing output was the wood and paper products sector, down 3.2 per cent on the month. Metal products were the next biggest faller, down 1.5 per cent. These latest figures confirm the indications from recent surveys of purchasing managers that manufacturing is contracting.

The ONS's overall production index – which includes mining, quarrying and energy – registered a surprise 0.2 per cent rise in August, but this merely made up for sharp declines in previous months.

Andrew Goodwin, senior economic adviser to the Ernst & Young Item Club, said: "It's clear that the manufacturing sector is struggling at the moment, with the orders pipeline very weak, domestically and latterly from abroad.

"That weak orders pipeline tells us that there is a tough winter in prospect and even on a best-case scenario it's likely to be well into next year before manufacturers enjoy any sort of pick-up."

There was further disappointing news in figures released by the British Retail Consortium and the accountants KPMG yesterday showing that retail sales declined in real terms in September.

Total sales were up 0.3 per cent but this was not enough to keep up with inflation of around 4.5 per cent.

Helen Dickinson, KPMG's head of retail, said: "With consumers' incomes being squeezed from all sides, many shoppers continue to steer clear of big-ticket items."

Meanwhile, the National Institute for Economic and Social Research forecast that the UK recovery will be the weakest coming out of any recession since the First World War. The economic think-tank estimates that GDP grew by 0.5 per cent in the three months to September. That would leave UK GDP 4 per cent below its pre-recession peak. A Treasury spokesperson said inresponse to yesterday's data: "The UK cannot isolate itself from what is happening to our major trading partners."