Manufacturing sinks to 26-month low

The Markit Purchasing Managers’ Index (PMI) recorded a level of 49 for August - a reading above 50 indicates growth - down from a revised reading of 49.4 in July.

The volume of new orders declined for the fourth month running in August, recording the sharpest fall since April 2009 and painting a bleak picture on the outlook for industry.

Samuel Tombs, UK economist at Capital Economics, said: “All in all the survey highlights the increasing risk that the industrial sector - and perhaps even the overall economy - is heading for a double-dip.”

The dismal figures will come as a blow to Chancellor George Osborne, who is banking on the private sector to keep the economy afloat as he rolls out a package of tough spending cuts in the public sector.

The manufacturing sector had until recently been the bright spot of the UK economy, but it has suffered a downturn in recent months as the UK and global economic outlook grows more uncertain.

Industrial production, which includes manufacturing, has declined for the last two quarters, dragging on overall economic growth.

Howard Archer, chief UK and European economist at IHS Global Insight, said: “It is evident that manufacturers are now finding life really challenging as domestic demand is held back by serious headwinds, notably including tightening fiscal policy and a major squeeze on consumers, while a slowdown in global growth is limiting export orders.”

Manufacturers linked the dip in new orders to weak demand at home as well as rising global economic uncertainty and lower levels of new export business, Markit said.

Overall production fell last month for the first time since May 2009, according to the survey.

Lower production was recorded in the intermediate sector, which involves the production of sub-components which are later used in the manufacture of another product, such as a gearbox for a car.

The investment goods sector, which includes plant equipment and machinery, also saw a drop in production.

The level of new work received from overseas clients fell at the fastest pace since May 2009, a marked turnaround from the near-record growth seen last December.

The outlook for the labour market remains bleak as August saw manufacturing employment fall for the first time in 17 months.

The country’s unemployment rate stood at 2.49 million, or 7.9%, between April and June, the Office for National Statistics said, after the total number of unemployed increased by 38,000.

There was some respite for the Bank of England as the rates of increase of average input prices and output charges eased further in August.

The Bank is battling with high inflation, which at 4.4% in July was more than double its 2% target.