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Slump in U.K. factory output dents recovery hopes

Simon Dawson/Bloomberg

British industrial output fell more sharply than expected in September, data showed on Tuesday, reinforcing fears an incipient recovery will struggle to gather pace.

Excluding a decline in June, due partly to an extra public holiday, the 1.7 per cent monthly fall was the biggest since August 2009 and much bigger than the 0.6 per cent decline analysts had forecast.

The data further complicates the economic picture for policy makers. Economists have been paring back expectations of more monetary stimulus in November since a surprise 1 per cent rise in British output between July and September.

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Many economists pointed out that the main driver of the industrial data weakness was a slump in oil and gas production, which was due to maintenance work on North Sea platforms.

However, manufacturing output rose by a smaller than expected 0.1 per cent in September on the month after a downwardly revised drop of 1.2 per cent in August, the Office for National Statistics said.

The figures supported British government bonds, helping them outperform their German counterparts.

The downbeat data come two days before the Bank of England (BoE) must decide whether to inject further cash into the economy to prop up the recovery.

The central bank has already bought government bonds worth £375-billion ($599-billion U.S.) in its quantitative easing (QE) program and several central bankers have made cautious comments.

"I think we can expect a downward revision of the (third quarter) GDP figure... More worrying is the effect this might have on fourth-quarter gross domestic product," said Brian Hilliard, economist at Societe Generale.

"As for the coming BoE decision, I think this will have very little effect. We've had a very strong suggestion from (Bank of England governor) Mervyn King that it might be time to sit back and just analyse what's going on rather than continue with QE."

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Britain's return to growth is at threat from public spending cuts, tax rises and low wage growth that have sapped consumer confidence, while the euro zone debt crisis has cast a dark cloud over the business outlook.

Business surveys have indicated a weak start to the final quarter of the year and economists have pointed out that one-off factors contributed to Britain's third quarter growth.

A survey showed on Monday that business in the dominant services sector expanded at the slowest pace in almost two years in October and optimism about the outlook dimmed.

Other news on the economy on Tuesday painted a mixed picture. British retail sales slowed sharply in October and house prices fell at a faster rate.

However, new car sales rose strongly and the car business lobby SMMT raised its forecast for sales this year.

Industrial production was 0.9 per cent higher in the three months that ended in September compared to the previous three-month period. It was unchanged in the three months to August.

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Mining and quarrying recorded the biggest monthly drop since February 1974, while oil and gas extraction posted the largest fall since records began in 1997.

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