Britain is said to be “perilously close to recession” after official figures showed that industrial output fell much more than had been expected in May.
Data from the Office for National Statistics (ONS) raised fears that economic growth came to a near standstill in the second quarter of 2008.
On the markets, sterling fell and the FTSE 100 index of leading shares lost early gains as the weak data encouraged investors to scale back their bets that the Bank of England will raise interest rates in the months ahead in an attempt to drive down inflation.
The ONS said that industrial production fell by 0.8 per cent in May, well beyond analysts’ expectations of a 0.1 per cent fall. It meant that year on year, output at the end of May was 1.6 per cent lower than at the same time last year. This was the biggest annualised fall since December 2005.
The fall was driven by a much sharper than expected decline in manufacturing output, which fell by 0.5 per cent on the month and was down 0.8 per cent on the year.
The ONS said record high temperatures in May had pushed electricity, gas and water output down by 5.2 per cent - the biggest fall since October 2001 - adding to weakness in the broader industrial production measure.
Economic growth slowed to just 0.3 per cent on the quarter in the first three months of the year and second quarter growth is now likely to have weakened further.
More up-to-date surveys have already been showing a contraction, raising fears that the economy could plunge into a recession.
However, the Bank of England’s monetary policy committee are also facing the strongest inflationary pressure since it was granted the power to set base rate in 1997.
The consensus is that base rate will be pegged at five per cent at the MPC’s meeting later this week.
“The sharp 0.5 per cent month-on-month fall in UK manufacturing output in May adds to recent evidence that the UK economy is perilously close to recession,” said Paul Dales, UK economist at Capital Economics.
He believes that industrial production is set to show a fall in the second quarter, suggesting that the industrial sector “is already in recession”.
Another economist, Philip Shaw of Investec, said: “It looks like we are going to experience broad-based weakness in the UK economy throughout the second half of the year, which should be enough to keep interest rates from rising.”
Ray O’Donoghue, head of UK of manufacturing at Barclays Commercial Bank, said: “Manufacturers along with other sectors of the economy are clearly feeling the pressure.”
Early trading on the forex markets saw the euro strengthen to 0.7933 pounds from 0.7922 pounds prior to the data being published. Against the dollar, the pound briefly weakened to as low as $1.9668 from $1.9706.
Meanwhile, it was reported in Berlin that German industrial output also unexpectedly fell in May - exceeding even the most pessimistic of forecasts - as a steady decline in orders hit production lines.
In seasonally adjusted terms, output fell by 2.4 per cent on the month in May, the German Economy Ministry said.
The mid-range forecast in a Reuters poll of 50 economists was for output in May to rise by 0.4 per cent forecasts ranged between a fall of 1.1 per cent and a rise of 1.4 per cent.
Weaker manufacturing orders, which fell for the sixth month in a row in May, hit output, the ministry said.
However, the ministry added that the calendar effect of two so-called bridge days - days often taken off after public holidays that fall on a Thursday - may have exaggerated the size of the drop in output.