December 7, 2011 / 9:35 AM / 7 years ago

Sharp fall in industry output raises recession fears

LONDON (Reuters) - British industrial output fell at its fastest pace in six months in October, official data showed on Wednesday, reinforcing concerns the economy may be sliding into recession after a string of weak business surveys.

Uncollected mail lies on the doormat of a closed shop in Manchester, northern England December 7, 2011. REUTERS/Danish Siddiqui

Adding to the gloomy mood, a leading economic think-tank said the economy grew by only 0.3 percent in the three months to the end of November, while Chancellor George Osborne again underlined the threat posed by the euro zone crisis.

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 which ends on Thursday.

Industrial output fell 0.7 percent in October, more than double the decline forecast by analysts and the biggest drop since April, the Office for National Statistics said.

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

“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,” said Philip Shaw, economist at Investec. “These figures seem to suggest it could be sooner rather than later.”


A growing number of economists reckon the 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 will inject more stimulus to boost growth when its current programme of 75 billion pounds 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 5 years, as well as a broad-based fall in manufacturing, that has been going on for several months.

Wednesday’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.

MPs had been hoping that manufacturing exports would help to drive a strong recovery, filling the gap left by deep public spending cuts and soft domestic demand. But the financial turmoil in the euro zone, Britain’s biggest trading partner, has dented these aspirations.

Chancellor Osborne said the euro zone debt crisis posed a big downside risk to Britain’s latest lower economic growth forecasts.

The independent Office for Budget Responsibility slashed its growth forecasts, which Osborne uses to calibrate his budget deficit reduction plan, to 0.7 percent for 2012 from a March estimate of 2.5 percent.

“There is a very significant downside risk to this forecast from the ongoing situation in the euro zone,” Osborne told MPs. “If the euro crisis deteriorates, if that leads to further deterioration in conditions in financial markets, that will have a significant impact on our economy.”

Some economists said it would be wrong to blame the euro zone crisis for all of Britain’s woes, noting data on Tuesday showed German industrial orders surged at their fastest pace since March 2010.

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“We are clearly having an issue accessing export markets relative to Germany, and everyone who’s looking for talk of a double-dip recession will probably get more encouragement from these numbers,” said Tom Vosa, economist at National Australia Bank.

“What we need to find out is whether it’s a temporary blip related to the euro zone 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.”

Additional reporting by Matt Falloon and Keith Weir; editing by Stephen Nisbet

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