Slowdown points to rate cut

Expectations of another cut in interest rates this week have been fuelled by figures showing an easing in manufacturing activity

The Chartered Institute of Purchasing and Supply (CIPS) said recent gains made by the sector were reversed in December as firms battled the effects of the credit crunch and higher costs.

The CIPS index fell to 52.9 last month, below the 53.6 forecast by analysts and down from the 54.3 recorded in November. A reading above 50 represents growth.

New orders also fell to a 21-month low in December, reflecting weaker domestic and foreign demand.

Economists said the weaker activity meant a further manufacturing slowdown was likely, increasing the chances that interest rates would be cut sooner rather than later. The Bank of England is due to decide on whether to change rates on Thursday this week.

Manufacturers are potentially facing tough times ahead, with the continuing impact of the credit crunch and rising energy costs. Employers body the CBI warned this month that the global credit crunch and other factors could have a tougher impact on the UK than on other economies because of its dependence on the financial sector.

The CBI has revised its forecast for growth in 2008 down to 2 per cent as it assessed the likely medium-term impact of the credit crunch. It expects about the same level of growth next year, but it has said that the reality could turn out to be worse.

But CBI chief Richard Lambert added: "It is important not to exaggerate the risks. The most likely outcome for the UK is that the coming 12 months will bring a soft, as opposed to a hard, landing after two years of above-average growth. If we allow ourselves to get carried away by today's gloomy headlines, we could talk ourselves into something much worse."

Image: Industry faces tough times

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