Weak exports snuff out factory revival

MANUFACTURING industry is sliding back into recession as stagnant high street spending and weakening export orders extinguish the tentative factory revival seen early in the year, three new surveys suggest today.

This gloomy scenario is likely to convert more industrialists to the belief that the Government should devalue the pound or pull out of the exchange rate mechanism to allow a sharp cut in interest rates.

David Kern, chief economist of National Westminster Bank, thinks the Government is likely to resist these pressures.

But he argued yesterday that the Government should consider a short-term boost to public spending on specific help for the housing market, and on infrastructure projects, like road and hospital building.

But the Treasury is looking for ways to cut spending programmes, following the Cabinet's decision to stick to the pounds 244.5bn spending planning total for 1993/4 announced in last year's autumn statement.

The Treasury expects that the amount spent on benefits for the unemployed will automatically have to be nearly pounds 3bn higher than estimated last year, implying lower spending elsewhere to compensate.

If the retrenchment in manufacturing industry sees the recession deepen in the second half of the year, the pressures on spending will only mount further.

The latest purchasing managers' index (PMI) from the Institute of Purchasing and Supply (IPS) suggests that manufacturing production was cut back in July for the first time in six months. The PMI fell to 48 per cent in July from 50.2 a month earlier and has now dropped for three consecutive months. Figures below 50 per cent suggest that production is actually declining.

The IPS reported that order books were weakening increasingly quickly. The sharpest falls were in orders for vehicles and mechanical engineering.

A similar picture emerged from a survey of smaller manufacturing companies by the Confederation of British Industry, part of its quarterly industrial trends survey. Domestic and export orders are expected to show no improvement in the next four months, after expectations of higher orders in April proved over-optimistic, the survey shows.

Smaller manufacturing companies cut back production in the last four months, having expected in April to increase it. Output is expected to fall slightly in the next four months.

Margins remain under pressure, with trading conditions tough. 'We are now seeing the greatest pressure on small manufacturers' prices since February 1959,' said Richard Brucciani, chairman of the CBI smaller firms council.

A survey of smaller manufacturing companies in London, carried out by the capital's Chamber of Commerce, showed a similar picture. Some 44 per cent reported a fall in orders in the second quarter of the year, while large and medium-sized companies reported little change. Export orders dropped for the eighth successive quarter.

'Small manufacturers are being hit by weak demand, high interest rates and the late payment of debts. These factors increase the likelihood of further business failures during the next few months,' said Jacqui Ginnane, the chamber's chief economist.

Pessimism about prospects for manufacturing industry has led City and academic economists to downgrade sharply their growth forecasts during the past month.

On average, they expect national output to be 0.2 per cent lower this year than in 1991 - having forecast a 0.4 per cent improvement a month ago, according to a survey carried out by the Treasury.

Oxford Economic Forecasting predicted this weekend that gross domestic product would fall by 1.1 per cent this year, with a feeble revival beginning in the third quarter of the year.