Labour calls for cuts rethink after manufacturing growth shrinks and mortgage approvals have worst April since 1992
Labour has stepped up its calls for George Osborne to rein in his public spending cuts after fresh evidence that Britain may be on course for a double-dip recession.
Manufacturers suffered their weakest month for almost two years in May, according to the closely watched purchasing managers' index (PMI), undermining the Treasury's hopes that the sector will drive economic growth over the coming months. The survey also persuaded City economists to revise forecasts of a rise in interest rates this summer.
At the same time, the Bank of England reported that mortgage approvals slipped to a four-month low in April, while lending to businesses fell, suggesting the fragile state of the financial sector is constraining the credit available to finance recovery.
The PMI slipped to 52.1 in May from 54.4 in April – a reading that was itself revised down – suggesting that manufacturing is expanding only modestly, despite Osborne's pledge to build a Britain "held aloft by the march of the makers".
Angela Eagle, the shadow Treasury minister, said: "This disappointing set of figures is further evidence that last year's economic recovery is stalling. Even the manufacturing sector now seems to have joined consumers in entering a more difficult phase." She added: "George Osborne risks getting us into a vicious circle. He needs to think again on the speed and scale of the cuts, and realise that getting the economy growing strongly again and more people into work is the best way to get the deficit down."
Manufacturers told Markit, which compiles the PMI survey, that output contracted in April for the first time in two years, and their future order books looked weak.
Some of the decline is likely to have resulted from short-term factors, including the extra bank holiday in April and the knock-on effects of Japanese shutdowns after the earthquake.
Nevertheless, analysts said the underlying pace of growth in manufacturing still looked worryingly slow. "With hopes that the manufacturing sector, boosted by a weaker pound, would be a source of strength in the otherwise lacklustre UK economic recovery, this is a bitter pill," said analysts at consultancy Fathom.
Rob Dobson, senior economist at Markit, said the sector had moved "from rapid expansion to near-stagnation". He played down the impact of the short-term factors, saying "domestic market weakness was the main drag on order books and output".
A Treasury spokesman said: "Recovering from such a deep recession is bound to be choppy, as the chancellor has made clear. That's why the government announced measures to support growth in the budget.
"But the budget was just the first step, and the growth review launched last year will continue for the whole parliament, to ensure government is doing all it can to support private sector-led growth and job creation."
The Bank of England's monthly lending figures, also released on Wednesday, gave little indication that the Treasury's "Project Merlin" pact with lenders had forced them to loosen their purse strings.
Mortgage approvals slipped to 45,166 last month, making it the weakest April since 1992, while consumer credit expanded by a net £500m – much more slowly than its pre-credit crunch pace.
Chris Crowe, an economist at Barclays Capital, said: "Net consumer credit has now recovered somewhat from the lows of 2009 and 2010, when it averaged less than £0.1bn, although it remains at barely a quarter of the level recorded during 2002-04."
Economist Howard Archer, of IHS Global Insight, said the weakness in lending could also result from anxious households paying down their debts.
"The desire of many consumers to get a tighter grip on their finances is a reflection of current very low confidence and is the consequence of an uncertain and somewhat worrying outlook for the economy and jobs as the major fiscal squeeze increasingly kicks in."
Recent GDP data has suggested the economy stagnated over the winter, with a 0.5% contraction in the snowbound final quarter of 2010 only just offset by an identical increase in the first three months of this year.
The Treasury is hoping for a return to more solid economic growth in the second half of this year. But after Wednesday's data suggested the slowdown continued into May, City economists pushed back their estimates of when the Bank of England would feel confident enough in the strength of the economy to start raising interest rates.
Malcolm Barr, of JP Morgan Chase, who had predicted an August increase, said that together with the continuing sovereign debt crisis in Greece and the weakness of global demand, the manufacturing survey was enough to convince him the Bank would raise rates in November, instead of August as he had previously forecast.
Peter Dixon, chief UK economist at Commerzbank, said: "We're looking at an economy that doesn't appear to be generating a huge amount of momentum, and on the back of the weakness of the first quarter, that's not a good place to be."