Manufacturing slows in July says CBI

British factory orders fell more sharply than forecast in July while industry expects the slowdown in manufacturing to continue over the coming months.

The survey by the Confederation of British Industry (CBI) doused hopes for improvement in the third quarter a day after official data showed the economy barely grew in the second quarter.

The CBI's survey showed on Wednesday that the total order book balance fell to -10 this month from +1 in June, well below forecasts for a reading of -2.

Firms were also less optimistic about output in the next three months, with the output expectations balance falling to +6 from +13, the lowest since last November.

"The survey does not bode well for hopes that the third quarter will see a marked improvement in GDP growth following the muted expansion of the second quarter," said Howard Archer, senior economist at IHS Global Insight.

Quarterly manufacturing data, also published on Wednesday, indicated the first drop in firms' optimism for two years, as export demand weakened sharply.

"Orders and output growth in the manufacturing sector slowed

slightly over the past quarter," said CBI chief economic advisor Ian McCafferty.

He blamed Japan's tsunami, which disrupted supply chains, and the euro zone debt crisis for harming sentiment.

"This slowdown is expected to persist into the third quarter. Consequently, manufacturers are now reappraising their business plans, with firms expecting to lower recruitment in the coming quarter and invest less in the year ahead."

The data provided some relief on the inflation front for the Bank of England with a drop in manufacturers' price expectations.

Companies planned to raise prices at the slowest rate since December 2009, the survey showed, with that balance falling to +4 from +27 in June.

The central bank kept interest rates at 0.5 percent last week despite consumer price inflation running at 4.2 per cent – more than double the bank's target.

Britain's anaemic growth rate has prompted investors to push back bets on the timing of an interest rate rise until the second half of next year, and some analysts believe rates could stay at their record low for longer.

"There was a marked softening in investment intentions among manufacturers, which is bad news for hopes that business investment can make a decent contribution to future growth and help the economy become more balanced," said Archer of IHS Global Insight