THE EURO-ZONE recession appears to have deepened in the first quarter of the year following a collapse in manufacturing orders in January.

At the same time, inflation in the 16-member currency bloc is proving weaker than expected.

The latest gloomy data increased pressure on the European Central Bank (ECB) to lower interest rates when governors meet next Thursday. Many economists forecast a 50 basis point cut in its main rate, which is currently at 1.5 per cent.

Manufacturers booked 34.1 per cent fewer new orders in January than in the same month last year, the biggest drop since Eurostat, the EU’s statistical office, began tracking the data in 1996. The month-on-month decline reached 3.4 per cent.

Howard Archer, an economist at IHS Global Insight, said this reinforced fears that the euro zone would “contract in the first quarter of 2009 by even more than the 1.5 per cent quarter-on-quarter drop seen in the fourth quarter of 2008”.

Hit by slowdowns in domestic and foreign demand, industry will be looking to the ECB to cut interest rates again.

Britain’s economy may also need a further boost from policymakers if it is to start to recover by the end of the year, Bank of England (BoE) chief economist Spencer Dale said yesterday.

British prime minister Gordon Brown is seeking agreement from the G20 developed and developing economies next week on more action to help the world economy, but BoE governor Mervyn King said earlier this week Britain had little scope for big spending plans.

Mr Dale, like Mr King, said Britain had room for smaller scale measures, probably to boost jobs and training. “There may well be a role for further targeted and temporary stimulus measures,” he said.

Economic data published yesterday showed Britain was in an even deeper recession than previously thought in the last three months of last year, with the economy shrinking by 1.6 per cent rather than an earlier estimate of 1.5 per cent.

“Although immediate prospects appear bleak, the substantial economic stimulus that is under way means that there are grounds for thinking that economic conditions may start to improve later this year,” said Mr Dale.

“I think the risks around this central path are weighted to the downside, reflecting the possibility that the actions taken by the authorities around the world . . . are slow to take effect. So there may still be more to do.”

But once the recovery was under way, the BoE would have to be quick to rein in expansive policy to avoid future inflation. “We will be prepared to respond with equal vigour on the way back up,” he said.