Manufacturing output drops sharply, despite sterling fall

Decline of 1.4 per cent in October worst performance since Second World War

Even by the depressed standards of recent weeks, the latest news on the state of British industry startled analysts, who last night described the data on manufacturing output as "dire".

Industrial output fell by 1.4 per cent in October, the Office for National Statistics (ONS) reported yesterday, far worse than economists had forecast and one of the feeblest performances since the Second World War. The ONS added that output has now fallen for eight successive months, the worst run since the slump of 1980.

The annual rate of decline, at 5.2 per cent, is the sharpest since the last recession in 1991 but looks set to deteriorate further. Most analysts expect the annual rate of decline to widen to more than 7 per cent in 2009, at which point British industry will have had its worst year since 1945.

The latest figures were particularly badly received given the 20 per cent depreciation in the value of sterling over the past year, which should have boosted the prospects of manufacturers with exports-based businesses. Despite that fall in the value of the pound, the ONS said the trade deficit widened last month, to a larger than expected £7.8bn in October compared with £7.4bn in September, as exports declined more quickly than imports.

Weak demand in the UK's main export markets countered the positive effects of the decline in sterling; over the three months to the end of October, exports to the US fell by £500m, to Germany by £200m, and to Japan by £200m, the ONS said. The scale of the downturn in manufacturing is forcing analysts to revise downwards their estimates of the scale of the recession now facing the UK.

Although industrial production now accounts for only 18 per cent of the UK's GDP, the depths of its misfortune suggests that the ONS may even have to revise its estimate of the contraction in the UK economy in the third quarter of this year from -0.5 per cent to -0.6 per cent. Most analysts believe the economy will shrink further, by as much as 1 per cent in the last three month s of this year, with even steeper falls during 2009. "Today's flurry of data confirms that activity all but fell off a cliff at the start of the fourth quarter of this year," said Paul Dales, UK economist at Capital Economics. "Overall, these figures suggest that the recession is deepening across the economy and that GDP may ultimately fall by something like 2 per cent next year."

The National Institute of Economic and Social Research said GDP fell by 1 per cent in the three months ending in November.

The gloomy outlook led to renewed calls for further aggressive cuts in interest rates by the Bank of England's Monetary Policy Committee (MPC), which has already cut the cost of borrowing in each of the past three months, and for the Government to "print money" – so called "quantitative easing" – to boost the economy.

David Kern, the chief economist at the British Chambers of Commerce, said: "The bigger than expected fall in manufacturing output highlights the dismal circumstances facing the sector. The MPC must persevere with further interest rate cuts and take steps towards quantitative easing. Unless the economic situation improves in the next few weeks, there is a very strong case for the MPC to cut rates by a further 1 per cent in January."

Economists pointed to the recent run of survey evidence from the Chartered Institute of Purchasing and Supply, and others, which suggests an even more catastrophic situation in manufacturing, services and construction developing over the next few months. Rising unemployment and bleak data from the labour market confirms that efforts by the Bank of England and the Treasury to restore confidence face a severe headwind from the reality and fear of joblessness and home repossessions.

View from the MPC: Long recession looms

The recession now threatening the British economy could be as long and severe as any seen in the post-Second World War era, according to one of the Bank of England's key policy-makers.

Andrew Sentance, a member of the Monetary Policy Committee (MPC), warned yesterday that the Bank's recent deep cuts in interest rates will take "several quarters" to work, and that "even if we do see a recovery beginning in the second half of 2009 – as suggested by the Bank's November Inflation Report forecast – this recession is likely to be comparable in length and depth with the previous three major post-war UK downturns in the mid-70s, early-80s and early-90s."

Mr Sentance added: "In each of these earlier episodes the output of the economy fell by at least 2.5 per cent over a period of a year or more, resulting in a significant rise in unemployment." Reflecting a widespread fear in official circles Mr Sentance also spoke of the need to "head off the potential deflationary risks".

The MPC has eased rates from 5 per cent at the beginning of October to 2 per cent now. Some economists predict rates at or close to zero in the first half of next year. Mr Sentance explained that "recent survey data have been weaker than that forecasts implied and so I now expect the recession to be of comparable depth to those previous downturns."

As a result of the "most serious banking crisis in modern history", a "large and uncertain wedge" has been created between Bank rate and rates prevailing in credit markets, said Mr Sentance. He supported moves to regulate the credit cycle in future, but also cautioned against "heavy-handed regulatory interventions".