Double dip fears grow as sector output tumbles

The Office for National Statistics (ONS) said industrial output fell 0.7 per cent during the month, more than double the decline forecast by analysts and the biggest drop since April.

The narrower manufacturing output measure also fell 0.7 per cent in October, again the biggest drop since April. On the year, factory output was just 0.3 per cent higher, the smallest rise since January 2010.

Philip Shaw, economist at Investec, said: “It’s a grim start to the fourth quarter. It tends to bear out our view that the UK is going to double dip and will re-enter recession. These figures seem to suggest it could be sooner rather than later.”

The figures confirm the Bank of England’s gloomy assessment of the economic outlook but are unlikely to persuade policymakers to extend their quantitative easing programme at their monthly meeting today.

A growing number of economists reckon Britain’s economy will contract for at least one quarter, either at the end of this year or early in 2012, and the OECD has gone so far as to predict a mild recession.

As a result, most analysts reckon the Bank of England will inject more stimulus to boost growth when its current programme of £75bn of asset purchases is complete in February.

The ONS said the decline in industrial output reflected a sharp drop in energy production due to the warmest October weather in five years, as well as a broad-based fall in manufacturing, that has been in place for several months.

Yesterday’s figures came after a survey of manufacturing purchasing managers last week showed activity in the sector fell at its fastest pace in two years in November, after a similarly weak performance in October.

Chris Forrest head of manufacturing for the Northern region at Barclays Corporate, said: “In this climate UK manufacturers are returning to a business strategy that has become very familiar over the past three years; keeping an incredibly tight rein on cost and working capital and only investing where essential.

“It is not a recipe for growth, but certainly a recipe for staying the course through a difficult period.”

Nida Ali, economic adviser to the Ernst & Young ITEM Club, said: “A dismal start to the fourth quarter but, given the recent survey data, it wasn’t unexpected.

“October’s monthly decline in manufacturing output is an accurate reflection of the sector’s ongoing struggles. The combination of a build-up in stock levels and a very weak orders pipeline is forcing firms to cut back production levels.

“This is another release in a long line of weak data that suggests a poor outturn for GDP growth in Q4.

“We expect the economy to stagnate at best, but a decline in GDP is looking increasingly likely.

“The eurozone crisis is decimating confidence and dampening demand from abroad, and this is crucial for the UK economy.

“The longer the eurozone debt crisis persists, the higher the possibility of the UK slipping back into a recession.”

Euro crisis deals a blow

Politicians had been hoping that manufacturing exports would help drive a strong recovery. But the financial turmoil in the eurozone has dented these aspirations. Some economists said it would be wrong to blame the eurozone crisis for all of Britain’s woes after data showed German industrial orders have surged at their fastest pace since March 2010. Tom Vosa, chief economist at Yorkshire Bank, said: “We are clearly having an issue accessing export markets relative to Germany.

“What we need to find out is whether it’s a temporary blip related to the eurozone confidence shock and it comes back a bit, but in line with retail it tells us it will be a miserable fourth quarter for UK output.”