British manufacturing is in the worst shape for two years because of eurozone recession and the slowdown in the consumer spending.
Second quarter figures from the RSM Robson Rhodes/EEF engineering outlook survey show the balance of companies reporting growth is down to just five per cent.
The growth is coming from a number of sectors, including basic metals electrical and mechanical equipment.
The collapse of MG Rover has reduced activity in the automotive sector and other areas such as transport equipment and metal products have also suffered.
The squeeze on manufacturing is coming from high raw material costs and increased competition from fast-growing China and India.
Bob Hale, Birminghambased chairman of Robson Rhodes' national manufacturing and technology group, said: "It is concerning that the survey reveals only a quarter of firms intend to increase capital investment, whilst 50 per cent are putting their plans on hold.
"UK manufacturers really have to squeeze out all unnecessary costs, manage cashflow, supplier and customer relationships, as well as continue to invest in the business, particularly in the area of product development."
The EEF has cut reduced its growth forecast for engineering from 2.6 per cent to 1.1 per cent and for manufacturing from 1.2 per cent to 0.5 per cent.
"Many of the countries within the eurozone have been struggling with weak economies not experiencing the levels of growth that the UK has consistently achieved," Mr Hale said.
"The effects of this are now filtering through and together with a fall in consumer spending, this is not helping matters."
Farah Baksh of Robson Rhodes added: "Companies developing advanced technology in niche markets are those that are outperforming the competition and will continue to do so.
"Businesses need to move up the added-value chain by getting closer to their customers and suppliers, developing better products and providing higher levels of service."
The report was underpinned by BDO Stoy Hayward's latest business trends survey which showed that economic growth is set to slow down and that business confidence has fallen to its lowest level since October
There has been little indication of the anticipated recovery in confidence following the General Election and the continuing slowdown is particularly pronounced in manufacturing.
BDO claims that weakening global demand will mean that Chancellor Gordon Brown will miss his economic growth targets of 3-31/2 per cent and face increased difficulty in limiting borrowing.
The BDO optimism index, an industry indicator of GDP growth two quarters ahead, fell from 102.3 in April to 100.5 in May.
This implies annualised economic growth of just 2.7 per
cent in the fourth quarter of
2005. The decline in shortterm business confidence has been especially pronounced in the manufacturing output index which fell by 1.7 points compared with the service output index which fell by just
Like Robson Rhodes and the EEF, BDO blames the decline on the global economic slowdown, particularly in euroland.
At the same time, fears of continued low house price growth are making consumers wary of committing to large purchases.
Kim Rayment of BDO's Birmingham business centre said: "The economic news following May's election has been unpromising."