Britain's manufacturing base has continued to shrink, though a new report finds the economy has a whole will avoid recession next year.

Latest figures from the Office for National Statistics show manufacturing output falling by 1.6 per cent in September after an unexpected rise of 1.2 per cent in August. Over the last three months manufacturing output was down 0.8 per cent, and fell 2.9 per cent year on year.

The largest falls were seen in the electrical and optical sectors, along with paper, printing and publishing.

The new figures will add to expectations that the Bank of England will cut interest rates when it meets this Thursday. They also add weight to CBI calls for action to help struggling sectors of the economy.

However, there was better economic news from a report by chartered accountants BDO Stoy Hayward. It says Bank of England interest rate cuts and consumer spending will keep the threat of hard times "at arm's length".

Despite blows to consumer confidence caused by the September 11 terrorist attacks and job losses in the travel and tourism sectors, the report says UK output will remain steady. Growth in the UK economy in the first quarter of 2002 will be an annual 1.7 per cent, it predicts.

But BDO's poll of polls for October shows confidence is at its lowest since the economic slowdown of 1998 and warns that annualised growth could drop to just 0.1 per cent in the second quarter of next year.

The report also predicts the Bank of England will reduce interest rates by a further 0.75 per cent over the next five months.