AS the sterling crisis came to a head in September the real economy

was going through a bad patch and the evidence from the Confederation of

British Industry suggests that there has been further slippage since

then.

The first concrete evidence that the economy was entering a period of

renewed weakness at the end of the third quarter emerged yesterday with

the publication of the industrial and manufacturing output figures for

September.

The official figures showed that manufacturing output dropped by 0.4%

in September, taking it down to its lowest level since January. In the

intervening months manufacturing output had been moving in a narrow

range with the trend slightly positive.

The September figures might have been a great deal worse. During the

month there was a sharp increase in motor vehicle output, mainly because

of a 50% increase in export production. But for this Central Statistical

Office officials estimate that manufacturing output would have fallen by

around 1%.

Iron and steel output declined 8% on the month, and output in the

mechanical and electrical engineering industries fell away from

relatively buoyant levels attained in August.

The three-month trend was not nearly so bad. Manufacturing output

dropped by 0.1% between the latest two quarters, suggesting that next

week's gross domestic product figures will show that the onshore economy

may have fallen slightly in the third quarter after its miniscule rise

in the second.

Against the third quarter of last year manufacturing output was 0.8%

down and is now 7.5% below its peak level in the second quarter of 1990.

The metals industries, including iron and steel, were hardest hit with

output down 1.9% between the latest two quarters and 4.8% lower than in

the third quarter of last year.

There are still positive signs in a number of sectors, such as other

manufacturing, where paper, printing, and publishing has been boosting

output, 0.3% higher between the latest two quarters and 1.8% above the

level of a year ago.

The severely depressed textiles, clothing, and footwear industries may

be over the worst with a 0.2% rise in output between the latest two

quarters and against the third quarter of 1991.

Even in engineering there was a rise of 0.1% between the second and

third quarters, though output was 1.9% lower than in the third quarter

of last year.

In other minerals and mineral products output fell by 0.2% in the

latest quarter and was 4.5% lower than in the third quarter of last

year. The chemicals industry shows respective declines of 0.6% and 2.3%.

On the yearly comparison the food, drink and tobacco industry is the

strongest performer with output up 2.3% in the year to the end of the

third quarter. But in the latest period the poor summer turned the

fortunes of the soft drinks industry, and overall food, drink, and

tobacco output declined by 0.7% between the second and third quarters.

Recovering well from the earlier maintenance schedules this year,

North Sea oil and gas production, which rose by 6.7% between the second

and third quarters, has saved the day for the economy. As a result,

broadly-based industrial production, which includes oil and gas, as well

as the energy and water industries, rose by 0.3% in September and was

0.6% higher in the third quarter than in the second. But it was the same

amount lower than in the third quarter of 1991.

On this basis economists are hoping for a small increase in total GDP

in the third quarter, in contrast to the declines in the previous three

quarters.

In the other energy industries, coal output fell by 4% between the

latest two quarters and was 10% lower than a year earlier, even before

the controversial programme of pit closures began.

Overall the Treasury is forecasting a 1% decline in manufacturing

output between last year and this, the same as for GDP. The process is

reversed next year with the Treasury pencilling in a 1% increase, much

gloomier than 1.75% average for the range of independent economists.

The Treasury would have known that manufacturing output was falling

away sharply at the end of the third quarter before Chancellor Lamont

delivered his Autumn Statement with its package of measures to boost the

weaker sectors of the economy.

The stock market showed disappointment yesterday that interest rates

had been cut by 1% rather than 2%. The City concluded that the next

reduction was some way off. It may depend on what the Bundesbank can do

before the end of the year. From now on cutting rates by full percentage

points would be likely to upset sterling, which yesterday held up quite

well as Lamont was seen to have taken no unnecessary risks at this stage

with his growth package.

The October inflation figures were pushed into the background by the

fall in manufacturing output and the continuing reaction to the Autumn

Statement.

It is too early for the recent sharp reduction in mortgage rates to

send the headline inflation rate plummeting and much too early for the

inflationary pressures arising from devaluation to start upsetting the

applecart.

For the third month in a row the annual rate of headline inflation

stuck on 3.6% as dearer petrol and some recovery in clothing and

footwear prices after the High Street sales were the main factors

pushing up the retail price index by 0.4% between September and October.

The Treasury's 1% to 4% target range for inflation relates to the

underlying rate, which excludes mortgage interest payments. Last month

this fell from September's 4% to 3.8%, its lowest level since March

1988.

Economists at James Capel detected further signs that service sector

inflation was continuing to decelerate. They calculate it fell from 6.9%

in September to 6.5% last month having peaked at 9.9% in April of last

year. Nevertheless inflation in service industries is still far too high

in relation to the economy as a whole.

NATIONAL Savings has reduced its interest rates following the

reduction in base rates announced in the Autumn Statement.

The current range of fixed-rate products have been withdrawn and

variable rates have been cut in line with the reduction in base rates to

7%.

The rate on index-linked Savings Certificates, which has remained

unchanged despite earlier base rate cuts, has now been reduced, with the

new sixth issue yielding 3.25% net plus inflation if held for five

years. This compares with 4.5% offered previously. The maximum holding

has been halved to #5000.

The new 40th issue of standard Savings Certificates will return 5.75%

net of tax compound over five years. Holders of matured certificates can

invest up to #10,000 in addition to the normal limit.

Series G Capital Bonds will offer 7.75% gross over five years and

series E Children's Bonds 7.85%. The new products will be on sale from

December 7. There will not be a replacement FIRST Option Bond for the

time being.

The new rate on the investment account will go down to 6.25% gross on

November 26 and on income bonds to 7% from December 26.

National Savings is still posing a formidable challenge to building

societies, increasing its net inflow of funds last month. This came to

#388m, up from #202m in September, when societies saw an outflow of

#264m. Including reinvested interest the contribution to Government

funding came to #525m.

Supported by a new press and television advertising campaign, the

gross intake was #867m, with the then highly-competitive index-linked

Savings Certificates proving the most popular, accounting for #224m.

FIRST Option Bonds sold #139m and fixed-interest Savings Certificates

#103m.

The movement has now contributed #3300m to the Government's coffers so

far this financial year, including #1100m of accrued interest.