Output blow raises spectre of a dive into recession

Britain's manufacturers are dragging the economy back into recession after the biggest blow to the sector since 2009, an industry survey warned today.

The Chartered Institute of Purchasing and Supply/Markit activity index, where a score below 50 signals contraction, registered 49.6 last month, showing Chancellor George Osborne's "march of the makers" still stuck in reverse gear.

While December's survey was stronger than the worst fears of City economists, even steeper falls in October and November left manufacturers suffering their worst quarter since the depths of recession in April-June 2009.

Andrew Goodwin, senior economic adviser to the Ernst & Young ITEM Club, warned: "It looks as if manufacturing was a sizeable drag on growth. We estimate that gross domestic product is likely to have contracted by around 0.2% and expect the economy to fall into technical recession in the first quarter of this year."

The Bank of England predicts "broadly flat" growth in the first half of 2012 as Europe's debt crisis hits home and is widely expected to step up its quantitative easing programme to pump more cash into the economy next month.

But there were also glimmers of encouragement after easing raw materials costs and the fastest rise in new export orders since April. Manufacturers reported a pick-up in new orders from Germany, eastern Europe and China although exports are well below the record levels seen last year.

Cips chief executive David Noble said Europe, which accounts for nearly half of the UK's export market, remained key to the economy's prospects this year.

He said: "It is encouraging to see output remain steady after the declines of recent months, but with the sector highly exposed to a shaky eurozone, and reports of softening demand, ironing out economic problems in key export partners will be critical to how the sector performs."

But manufacturers are eating into backlogs to maintain growth after the survey showed outstanding workloads falling for the 11th month in a row.

Markit's senior economist Rob Dobson said the survey "maintains some scope for further stimulus from the Bank" and warned: "The trend in overall order books needs to improve if the sector is to avoid a protracted period of lacklustre performance."