Slump hits UK 's growth hopes

A DISASTROUS slump in manufacturing has sparked fears about the economy and industry calls for the Bank of England to leave interest rates on hold tomorrow.

Factory output dropped 0.8% in August - the biggest fall in nearly two years, according to official data and is the first time output has fallen for three months on the trot since January 2002. The year-on-year growth rate fell from 0.7% to 0.4%.

The news shocked the City, where pundits had pencilled in a 0.3% increase. 'Dreadful!' said John Butler at HSBC, pointing out that Britain's industrial performance over the past few years has been the worst among the Group of Seven rich nations.

The pound shed two-thirds of a cent against the dollar and a quarter of a penny against the euro as traders bet a 'no change' decision on rates from the Bank's monetary policy committee tomorrow looked a done deal. Rates have been held at 4.75% since August.

Pinning the blame on poor performance by the transport equipment, electrical and optical equipment and machinery sectors, the Office for National Statistics said manufacturing's recovery had 'definitely slowed'.

Jonathan Loynes at Capital Economics went further, saying the recovery-was in danger of petering out. Experts said the manufacturing setback raised the prospect that the economy expanded by less than its long-term 'trend' growth rate, reckoned to be about 0.6%, in the third quarter. The National Institute of Economic and Social Research estimates 0.4%.

'A below-trend outcome would clearly lower the bar before the MPC was prepared to think about a possible cut in rates should the data fail to bounce as we move through the fourth quarter,' said Malcolm Barr at JP Morgan.

Industry groups said the figures highlighted the plight of British manufacturers struggling with higher borrowing costs, slower domestic and export demand and record oil prices, which today hit a fresh peak of $51.48 a barrel.

Brendan Barber, general secretary of the Trades Union Congress, said: 'We always said that commentators were complacent to claim that manufacturing had turned the corner. Thinking positively about industry is not going to help it grow and save jobs.'

David Kern, economic adviser to the British Chambers of Commerce, said: 'The risk of renewed recession in manufacturing cannot be ruled out. There should be no question of early interest rate increases.'

There was some relief for beleaguered Jaguar today, with September figures showing UK sales rose 3.37% to 6,220 cars. MG Rover's dismal recent performance continued with the marque's sales falling about a third on the same month a year earlier, according to the Society of Motor Manufacturers and Traders.