Manufacturing takes alarming dip

Chancellor George Osborne's Budget rallying cry looked limp as the Chartered Institute of Purchasing and Supply/Markit's August survey of manufacturing health blamed a month of financial turmoil and dire economic news for sapping export markets in Europe and the US. The fastest slide in new orders since 2009 was behind the output fall.

Its index of overall activity, where a score below 50 indicates industry contraction, registered 49, the lowest for 26 months.

The latest evidence of faltering growth will add to the pressure on Bank of England rate-setters to come to the aid of the UK economy with a fresh round of money-printing. Economists already believe the fragility of the recovery is such that interest rates will remain on hold at their 0.5% record low until 2013.

Rob Dobson, senior Markit economist, said: "The second half of 2011 has so far seen the UK manufacturing sector, once the pivotal cog in the economic recovery, switch into reverse gear."

CIPS also highlighted the first fall in staff numbers among manufacturers for 17 months amid a new caution over the outlook. Most worrying of all, however, is the collapse in exports, as a shift away from importing and spending to an export and investment-led recovery is a key plank of the Bank of England's hopes for a rebalanced economy.

Dobson added: "The sudden and substantial drop in new export orders is particularly worrisome, with UK manufacturers hit by rising global economic uncertainty, just as austerity measures are ramping up at home. As consumer and business confidence are slumping both at home and abroad, it is hard to see where any near-term improvement in demand will spring from."

Figures from Germany confirmed the powerhouse economy's anaemic 0.1% growth between April and June. CIPS added the one "silver lining" for the UK economy is the easing inflation pressure on businesses as input costs rose at the slowest pace for 20 months. Factory gate prices rose at the slowest pace since last November, removing another obstacle to further quantitative easing.

Most experts were hoping for a bounceback after sluggish 0.2% growth in the second quarter but pundits said the risk of more disappointment had increased. Samuel Tombs, UK economist with Capital Economics, said: "All in all the CIPS survey highlights the increasing risk that the industrial sector, and perhaps even the overall economy, is heading for a double dip."