Chancellor George Osborne buckled under a double blow today after a shock slide for Britain’s manufacturers and a ballooning trade deficit.

Osborne has vowed to stay the course on deficit-cutting plans at the Conservative Party Conference, despite the IMF slashing UK growth forecasts for this year and next and admitting austerity had a bigger impact on growth than it originally thought.

But dire figures added to the coalition’s headaches as manufacturing output shrank 1.1% in August and July’s post-Jubilee bounce was also revised lower. Overall industrial production, including sectors such as oil and gas extraction and mining, fell 0.5%.

There was little relief in the latest trade figures as the UK’s goods trade gap with the rest of the world soared £2.5 billion to £9.8 billion during August. Exports fell 4% over the month to £24.6 billion against a 4.5% rise in imports, leaving hopes for a rebalancing of the economy an even more distant prospect.

The UK’s overall trade deficit stood at £4.2 billion over the month, the second highest on record. The apparent weakness of the economy tempers hopes for a significant recovery in the third quarter after the Diamond Jubilee knocked 0.5% off growth between April and June. The figures raised expectations of more money-printing from the Bank of England in November.

Markit chief economist Chris Williamson said: “A batch of dismal data and a gloomier assessment of the economic outlook has cast a further dark cloud over the UK’s economic health, piling pressure on the Government to review its fiscal policy and growth strategy.

“The economy may still pull out of its recession in the third quarter, but a return to contraction in the fourth quarter cannot be ruled out.”

The biggest impact on the manufacturing sectors was a 4.5% fall in output from car makers during the month.

But the gloom was slightly lifted by the National Institute of Economic and Social Research, which predicted the recession would end in the third quarter. It said the economy would grow by 0.8% in the three months to the end of September but added that this was because of special events such as the Olympics.

When stripping out these factors, growth would still be sluggish at 0.2%-0.3%, said the think-tank.

COMMENT: IT’S A BAD STEER FROM OSBORNE

Here's George Osborne at the Conservative Party Conference in Birmingham: “We made a promise to the British people that we would repair our badly broken economy. That promise is being fulfilled.”

This kind of rhetoric may tickle the Tory faithful in la-la land, but it is being increasingly disproved by the actual data. The latest let-down from manufacturers merely adds to the evidence of an economy struggling to escape stall-speed. And Osborne’s talk on Tuesday of “vast new markets for British exports” is belied by latest trade numbers which in fact show a 4.5% decline in exports during August.

His defenders point to one-off events like the Jubilee, but virtually no growth in two years tells the story. It’s the weakest recovery in 100 years and he’s making it worse with a wrong-headed strategy. But if he can’t even put a Budget together without it unravelling within weeks, how can we expect him to steer the economy?