Mood across factories slumps to two-year low

Britain's manufacturers are increasingly downbeat about the economy, with confidence in the sector plummeting to a two-year low, according to a new survey.

Optimism has been hit by both weak trends at home and by the global slowdown as sentiment across the eurozone fell in response to the ongoing debt crisis, the accountancy firm BDO said.

As a result, its business confidence index for the manufacturing sector dropped to 90.1 in June, equating to a 26-point fall over the span of four months, with the index standing at 116.4 back in February.

"Such a marked slump in business confidence in the manufacturing sector is a real concern given that it has provided the propulsion for the economy recovery so far," BDO partner Peter Hemington said.

Although the prevailing weakness in sterling should spur manufacturing exports, as it allows British firms to compete better with international peers, the boost had been limited by rising inflation. Input prices, such as those for oil and industrial metals, have enjoyed steady gains since the beginning of the year. And despite periods of moderation, prices remain at elevated levels.

Reflecting this, BDO said that, while confidence went south, its index of inflation expectations had gone the other way, climbing to 112.9, the highest reading in 33 months.

"The weakness of the pound, which should make manufacturing exports more competitive, has failed to generate the hoped-for returns," Mr Hemington said.

"Perhaps this is because, with today's integrated global supply chains, the benefits of the low exchange rate have been offset by higher input prices."

But BDO warned against a rise in interest rates, with Mr Hemington calling for a continuance of loose monetary policy against the backdrop of weak growth. "As recovery prospects over 2011 seem sluggish at best, the Bank of England should continue to consider a third round of quantitative easing to provide some much-needed impetus for growth," he argued.