MANUFACTURING is heading for a recession as serious as the one which decimated the industry a decade ago after new research revealed that the outlook had taken a “significant” turn for the worse, a gloomy new report warns.

Research for the Engineering Employers Federation suggested that tens of thousands of jobs are set to be axed and trading conditions will be among the toughest for 20 years.

A survey of more than 800 firms highlighted that the sector was now going through a “significant and sustained downturn”.

The business group’s chief economist, Steve Radley, said manufacturing was now heading for a recession as deep as the downturn in the early 1990s when an estimated 400,000 jobs were axed.

He called on the Government to take urgent action “in days and weeks rather than months” to improve the cashflow to firms after revealing that banks had withdrawn overdraft facilities or made other changes “overnight” which were causing huge problems to industry.

Some form of state guarantee on lending might have to be brought in by the Government because productive, well-run firms were now struggling, he said.

“We are getting to the stage where we have to look at more radical forms of action. Very productive companies are finding they are not able to access credit. Manufacturers have made substantial progress in recent years in improving their performance but the next 12 months are set to be some of the most difficult in two decades.

“What marks this downturn out from others is the alarming rate at which conditions have deteriorated through the autumn due to the problems in the financial markets.”

The study showed that domestic orders were the weakest since 2001, the outlook for jobs and investment has worsened, business activity is forecast to get worse in the next few months following a “widespread” downturn in all manufacturing sectors, especially the motor industry.

Exports suffered a big decline, reflecting the downturn in the world economy, especially in the eurozone, the survey showed.

The worst affected region was the West Midlands, although the pace of job losses accelerated across the UK in recent months, said the EEF.

The business group warned that 90,000 manufacturing jobs will be lost next year and Mr Radley said it was hard to see how the UK could start to emerge from recession next summer, which official forecasts have suggested.

“There has been a substantial blow to confidence since September and it takes time to get that back. Markets have gone off the cliff for many companies and the situation has worsened significantly. The deterioration is much faster than in previous downturns.”

Mr Radley also revealed that firms were starting to discuss pay cuts as part of moves to avoid laying off staff.

Bob Hale, of Grant Thornton, which helped with the research, said: “The survey indicates that the positive progress made by the sector over the last few years has been destroyed almost overnight by the catastrophic effect of the recent turmoil in the financial markets.

“The sector needs immediate and positive help from the Government and the Bank of England to ensure the release of funding for investment and development and also for further help in interest rate cuts and tax incentives. Without this help, the sector faces a very bleak outlook for 2009."