Confidence among manufacturers has plunged amid signs that the credit crunch is beginning to take its toll on the previously resilient sector.

There was gloom across the board in the CBI's monthly industrial survey as manufacturers reported sharp falls in new orders while the cost of raw materials and energy spiralled.

Confidence in the sector fell to a five-year low. The business optimism balance decreased from minus 17 in the three months to January to minus 23 in the three months to April.

A balance of 13 per cent more firms reported a fall rather than a rise in new orders in April - a reversal from March when 7 per cent more firms reported a rise than a fall. This is the biggest reversal in orders since the records began in 1977.

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Hopes that the weak pound would help to boost exporters were also dashed. Export orders fell from a balance of plus 3 in March to minus 12 per cent in April.

The increasing price pressures on manufacturers appears to have ruled out the chance of price cuts to boost activity.

Domestic and export prices are rising at their fastest levels since 1995, the survey showed, and similar rates are expected over the next three months.

A balance of 21 per cent of firms reported that their prices had risen rather than fallen in the past three months, the highest level since April 1995. A balance of 34 per cent of firms expect to pass on rising costs to customers in the coming months.

Ian McCafferty, chief economic adviser to the CBI, said: “Manufacturers are no longer able to absorb continuous cost increases into their profit margins.”

Analysts said the data was evidence that the global downturn was outweighing the benefit of the weak pound.

They gave warning that the sector could be headed for a recession.

Paul Dales, UK economist at Capital Economics, the economic consultancy, said: “The much weaker tone of the survey in April supports our view that the lower pound will not prevent the manufacturing sector from entering a recession.”

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