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Survey fuels manufacturing fears
Fears over the health of the manufacturing sector were fuelled by signs that the sector's woes continued into the new year.
A survey by business body CBI found that both domestic and export orders fell in January for the first time in two years, while production weakened sharply over the past three months.
Although a modest rise in export orders is expected in coming months, the sector remains "fragile", it warned.
The survey offers further evidence that manufacturers are failing to spearhead the UK's recovery by boosting exports as hoped by the Government.
It comes after official figures revealed that manufacturing declined 0.9% in the final three months of 2011, which was a key driver in the UK's worse-than-expected 0.2% fall in GDP.
The sector, which had been in growth earlier in the year, has been hit as weak consumer spending depressed demand in the UK, while its key exports were hit by the eurozone debt crisis.
CBI chief economic adviser Ian McCafferty warned: "While the acute fears seen at the end of last year over global demand may be subsiding, 2012 will prove to be a difficult year for UK manufacturing, as the crisis in the eurozone - our biggest export market - has yet to reach any definitive resolution."
The CBI survey revealed that manufacturers expect output to rise slightly in the next three months despite worsening confidence about the general business situation and exports amid fears over the slowdown in the world economy.
Andrew Sissons, a researcher at The Work Foundation, said the health of the manufacturing sector was key to the UK's recovery.
He said: "Without a recovery in exports and manufacturing it is hard to see how the economy can escape its trajectory of low growth in the short term.
"The Government must focus on restoring confidence to business and boosting exports in the year ahead - this must start with a coherent and substantial growth plan in the Chancellor's Budget in March."
The UK's fourth quarter contraction was also caused by a decline in the construction industry, which saw output drop 0.5% compared with a 0.3% rise the previous quarter.
Economists said the Government's austerity cuts and falling confidence amid the eurozone debt crisis contributed to the fall.
The economy was also hit by a 4.1% fall in the gas and electricity sectors as the warm weather caused households to use their central heating less.
And a public sector strike on November 30 caused nearly a million working days to be lost but its effect was likely to have been small, according to the Office for National Statistics.
Meanwhile, the powerhouse services sector, which accounts for three-quarters of the economy, ground to a halt as consumers reined in spending as wages failed to keep pace with eye-watering inflation.
As a result, the part of the services sector that includes retailers, hotels and restaurants suffered 0.5% decline as consumers, who have suffered the longest attack on their spending power since the 1920s, cut back on luxuries.
This was despite retailers putting on a frenzy of pre-Christmas special offers in an attempt to drum up trade.