Pound falls further as manufacturing hits 10-year low

UK manufacturing output plummeted to a 10-year low in April, dealing a fresh body blow to the pound but raising hope of further cuts in interest rates.

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UK manufacturing output plummeted to a 10-year low in April, dealing a fresh body blow to the pound but raising hope of further cuts in interest rates.

The manufacturing sector fell by 0.9 per cent in April, taking the fall for the latest three months to 1.1 per cent ­ its worst performance since August 1991. The sector, which makes up a fifth of the economy, has suffered four successive months of contraction. Analysts said they believe it is now on the brink of recession.

The slump was triggered by a 22 per cent output collapse in the once-booming sub-sector of optical networking and mobile phone makers. This sector has contracted 40 per cent this year, as the hi-tech boom's reversal has sent shock waves triggering mass redundancies and profit warnings.

The Office for National Statistics said the driving force for the output collapse was a slump for a "few big players" in the optical networking industry. This includes manufacturers of fibre-optics and cable for broadband communications.

Economists said the sharp slump in manufacturing had increased the chances of a rate cut next month. Danny Gabay, at JP Morgan, said the collapse of the hi-tech industry had finally shown that the vast majority of manufacturing had stagnated for the four years since the pound started to strengthen against the euro.

"The mask has now slipped," he said. "The Bank should keep a loosening bias, but lower rates will do little to alter the plight of manufacturing, which is caught in the vice of a weak euro and weak global demand. "These data bolster the economic case for euro entry," he said, but added that an interest rate of 4.5 per cent ­ the current European rate ­ and a devaluation of the pound could send inflation surging to 4 per cent.

The manufacturing data dealt a blow to the pound, which has fallen sharply since a report in The Independent on Wednesday said a Labour government would use a landslide election victory to start a campaign in September for entry into the euro. Sterling tumbled yesterday almost 1 cent against the dollar to a fresh 15-year low of $1.3803. It drifted to a three-week trough of 61.40p, or DM3.19 against the German mark.

Analysts said sterling was now vulnerable because the markets were worried the pound needed to fall another 10 per cent against the euro to achieve a rate at which it could join the single currency.

Analysts said the Monetary Policy Committee was facing an increasingly painful dilemma. While manufacturing was weak, domestic demand ­ house prices, consumer lending and retail sales ­ was strong.

However, some economists said there no need for a rate cut. Michael Hume, at Lehman Brothers, said: "While grim for manufacturers, in terms of GDP the report was not nearly so bad as the headlines suggest. Moreover, the MPC will have had access to these data when it kept interest rates on hold."