Manufacturing shrinks as economic pain spreads

By Sumeet Desai

LONDON (Reuters) - Manufacturing is shrinking at its fastest rate in a decade and the number of companies going to the wall has shot up dramatically, two reports showed on Friday, raising fears the economy may soon be in recession.

Bellwether department store chain John Lewis added to the gloom. Sales in the week to July 26 were 4.5 percent lower than in the same period a year earlier as consumers grappling with the soaring cost of living cut back on non-essentials.

Higher inflation also means not one analyst polled by Reuters expects the Bank of England to cut interest rates to boost the economy next week. Rising gas bills could soon push inflation to more than double the central bank's target.

"The risk of a few quarters of declining GDP (gross domestic product) continue to rise," said Matthew Sharratt.

"We still believe the UK is more likely to virtually stagnate than fall into outright recession though, particularly if the recent plunge in oil prices---which has not yet been captured by survey data--is maintained."

Prime Minister Gordon Brown is suffering. A poll on Friday made him out to be the second-most unpopular prime minister in British history.

He is still banking on an economic recovery next year to bolster his fortunes. Consumer confidence has crumbled as people worry about their own finances and the state of the economy.

MANUFACTURING RECESSION