British industrial output fell much more than expected in May, official data showed today, raising fears that economic growth is freezing up.
The weak reading weighed on sterling and the British stock market, as investors scaled back their bets that rising inflation would outweigh economic growth worries and force the Bank of England to raise interest rates this year.
Borrowing costs now seem more likely to remain on hold for a while before falling to bolster the economy, economists argue.
The Office for National Statistics said industrial production fell 0.8 per cent on the month, well beyond analysts' expectations of a 0.1 per cent decline. This left output 1.6 per cent lower on the year, the biggest drop since December 2005.
The figures back up the increasingly gloomy picture painted by more up-to-date surveys which show Britain skirting close to its first recession since the early 1990s.
"The economy is now slowing sharply and is likely headed for a period of outright contraction," Michael Hume, an economist at Lehman Brothers investment bank.
"Once the (BoE) Monetary Policy Committee decides that a recession is more likely than not, we expect it to cut rates," he said. "For the moment we think that that will happen only by November, but the chances of an earlier rate cut are not far below 50 per cent."
Two successive quarters of economic contraction are regarded as a recession.
The contraction in industrial production in May was driven by a much sharper than expected decline in manufacturing output, which fell 0.5 per cent on the month and was down 0.8 per cent on the year.
The ONS said high temperatures did little to help either. Electricity, gas and water output were down 5.2 per cent, the biggest fall since October 2001.