Growth in the manufacturing sector slowed almost to a standstill in January as export orders fell, but high oil prices drove companies' costs to a three year high, a survey showed on Friday.
The findings illustrate the policy dilemma facing the Bank of England, which is expected to cut interest rates by quarter of a point next week despite signs that inflation is likely to rise well above target in the short term.
The Chartered Institute of Purchasing and Supply and NTC, the research group, said their index of manufacturing activity fell from 52.4 in December to 50.6 in January, well below analysts' forecasts and the weakest in more than two years. A reading below 50 would mean activity was contracting.
Export orders fell for the first time since 2005 as the US economy softened, despite the depreciation in sterling, and manufacturers also reported the fastest decline in demand for investment goods since September 2001.
“This supports our view that any boost from the fall in the pound will not offset the impact from the global slowdown in the near-term,” said Paul Dales at Capital Economics, who expects the sector to enter recession this year.
The survey suggests manufacturers are preparing for a tough period, running down stocks of finished goods and raw materials, and cutting jobs after a year of rising employment.
Yet companies' pricing power has increased to the highest level on record. The index reading for factory gate inflation rose from 55.6 in December to 57.9 in January, reflecting even sharper increases in input prices as higher oil prices drove up chemicals, energy and transport costs.
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