FEARS that the UK economy is heading for a recession intensified last night as a key report showed manufacturers suffering their worst month since the aftermath of 9/11.
Economists described the results of the latest purchasing managers' index (PMI), a monthly survey of UK manufacturing companies, as "truly dreadful".
A sharp and sudden slowdown in demand both at home and abroad in parallel with record-breaking ri
ses in costs of raw materials drove manufacturers to scale down production and to a degree not seen since 2001.
Job losses loomed as manufacturers cut staff to offset rising costs and poor orders, with more reductions expected in coming months.
The gloomy news came as Grant Thornton's Quoted Retail Companies Index revealed that trading among the UK's quoted retailers was at its lowest ebb for more than three years. A quarter of all retail firms on the stock market reported negative trading statements in the past three months.
Signs that Britain's manufacturing industry is teetering on the edge of a recession, combined with fresh evidence of a high street squeeze, means the UK economy as a whole is likely to slow even further than many have predicted.
Those fears weighed on the London market, with the FTSE 100 index closing 146 points, or 2.6 per cent, lower at 5,479.9. Just five blue-chips were left in positive territory.
Meanwhile, a report published today by the Centre for Economics and Business Research (CEBR) forecasts GDP growth of just 1.3 per cent next year, its lowest level since 1992, against Treasury estimates of about 2.5 per cent. The CEBR prediction matches last month's CBI forecast.
Chris Williamson, chief economist for Markits, the co-publisher of the PMI report along with the Chartered Institute of Purchasing and Supply (Cips) ,said the extent and the speed of deterioration of economic factors facing manufacturers came as a shock as there was no one big reason to explain it.
He told The Scotsman: "It is rare we get falls of this magnitude without special occurrences such as the 9/11 terrorist attacks or the ERM (European exchange rate mechanism] crisis.
"For this to happen just because there is a general malaise is very worrying. The speed with which we are declining is of concern."
The report's main index fell to 45.8 in June from a downwardly revised 49.5 in May, the weakest since the end of 2001 when activity was hit in the wake of the terror attacks on the US.
The 50 mark separates expansion from contraction, meaning manufacturing has slowed two months in a row.
The survey, which measures new orders, output, employment, delivery times and stock levels, found that input prices – measuring the cost of raw materials – have increased at the fastest rate in the report's 16-and-a-half-year history.
New orders within the UK market were hit hardest, as demand from construction, retail and the public sector slackened.
Yet, the report's exports index also fell, from 51.1 in May to 47.4 in June, as economies in key foreign markets including China, the US and France also slowed. Rather than helping exports, the softening of sterling against the euro only served to push up the cost of raw materials further.
Jobs were cut in June at their sharpest rate since August 2005, with worse expected in the coming months.
Howard Archer, chief UK economist at Global Insight, said: "This is a truly dreadful report in every respect, which encapsulates the extremely difficult position that the Bank of England is in."
