By Fiona Shaikh
LONDON, Dec 11 (Reuters) - The outlook for Britain's economy darkened on Thursday with news of a sharp contraction in manufacturing and construction orders, plunging price expectations and dire warnings from retailers pointing to a long and painful recession ahead.
A survey by the Confederation of British Industry showed factory orders continued to contract sharply this month and that even a 20 percent fall in the pound this year had failed to boost export demand.
And companies saw worse to come, with expectations for production in the coming months remaining at their lowest since the deep economic downturn of 1980.
Things are also looking increasingly glum for the construction industry, with official data showing new orders in the three months to October plunged 21 percent on the year, mainly due to a slump in house-building.
And the public's expectations for inflation in the coming year plunged to 2.8 percent in November from a record high of 4.4 percent in August, suggesting that price pressures have subsided quickly amid falling energy prices and the economic slowdown, according to a Bank of England survey.
The CBI said manufacturers did not expect to raise prices in the coming months and that some big companies were even considering price cuts.
Analysts said Thursday's glum news reinforced the case for the Bank of England to keep cutting interest rates in 2009.
"We currently forecast the Bank of England to reduce interest rates by a further 75 basis points in January," said Howard Archer, economist at IHS Global Insight. "However, another 100 basis point cut is looking ever more likely as the economic downturn continues to deepen."
The central bank has already sliced 3 percentage points off borrowing costs since October to 2 percent, their lowest in more than half a century, and some economists see them at close to zero in the first half of 2009.
Still, BoE policymaker Kate Barker said fiscal and monetary policy measures should at least help to stabilise the economy.
"I anticipate there will be a recovery toward the end of next year -- by which I mean there will come a point where I don't expect things to get worse -- but it is the pace of that recovery which is hard to judge," Barker told a regional newspaper.
HIGH STREET HORROR
But for now, things are looking bleak.
Some experts reckon the economy shrank by as much as 1 percent in the last three months of this year, double the rate of contraction in the third quarter.
And consumers are still feeling the pinch despite lower interest rates as banks have been reluctant to reduce lending costs. Rising unemployment and fears about job cuts are also putting people off splashing out.
General retailer Woolworths is shutting up shop after nearly a century on the High Street -- a first major victim of the spending squeeze. And other stores have slashed prices to encourage people to start their Christmas shopping early.
Supermarket giant Tesco halved prices on many products for the festive season, taking its lead from Marks and Spencer and Debenhams, which have also offered massive price reductions.
And music, computer games and books retailer HMV Group Plc, said the outlook had deteriorated since October.
"The downturn in both the manufacturing sector and the overall economy has much further to run yet," said Paul Dales, economist at Capital Economics.
(Additional reporting by Matt Falloon; Editing by Victoria Main)