Decline in manufacturing fuels fears over economy

Manufacturing industry appears to be sliding back into recession after staging a tentative recovery early in the year, official figures showed yesterday. Companies are thought to be making fewer goods because high street demand failed to revive in the wake of the general election.

Signs that the economy may be weakening are likely to add to jitters on Tory backbenches about the Chancellor's 'high risk' strategy. But the Cabinet united yesterday behind John Major's all-out attack on inflation.

Some moderate backbenchers conceded that the Government's approach could yet come unstuck, forcing Mr Major into humiliating retreat. One senior MP volunteered that if that happened the Prime Minister could face the same fate as his predecessor - a challenge to his leadership.

The 0.6 per cent fall in manufacturing output in May was larger than City forecasts. 1 per cent in April, rather than rising by 0.2 per cent as first thought. Output fell in the minerals, chemicals and engineering industries. It was flat in food, drink and tobacco and rose in metals and textiles. Energy output fell 2.2 per cent. Government statisticians added that output fell by 0.

Economists now fear that output in the economy as a whole may have been lower between April and June than in the previous three months, rather than increasing as widely expected. 'It is touch and go whether we will get an eighth successive quarter of recession', said Gavyn Davies, of the City firm Goldman Sachs.

The Treasury said that May's fall in output was 'somewhat disappointing', but argued that the figures were volatile. Output in the three months to May was 0.6 per cent per cent up on the previous three months. This was the third successive rise on this basis, but smaller than last month's.

Fears of further falls in factory output were fuelled by a survey of businesses by Dun & Bradstreet, which showed companies were less optimistic about profits and orders than three months ago.

Treasury officials forecast in their unpublished June analysis of the economy's prospects that national output would be lower in 1992 than last year. The more gloomy of Treasury calculations suggests the recovery may not even begin until next year. But when Neil Kinnock used his last Commons Question Time as Labour leader to urge a summer rethink on economic strategy, Mr Major stuck by his prediction that recovery would begin by the end of the year and insisted that lower inflation was the foundation for growth.

Addressing his own side as much as the Opposition, Mr Major said: 'I know it is not easy, I know it is uncomfortable, I know it is frustrating when that growth does not immediately appear, but I know of no other way . . . and I am determined to stick to the policies that I believe are in the medium and long-term good.'

In spite of the defensive barrage laid down over the last week, ministers recognise that backbenchers have yet to be persuaded, and Norman Lamont, the Chancellor, was yesterday drafting an end-of-term response to the pervasive disquiet. This will intensify if - as feared - the Bundesbank tightens its monetary policy tomorrow, threatening higher interest rates in Britain and elsewhere in Europe.