July 7 (Bloomberg) -- U.K. factory production unexpectedly fell in May for the first time in three months, suggesting the economy is still in the grips of the recession.

Manufacturing output dropped 0.5 percent from April, when it stagnated, the Office for National Statistics said today in London. The median forecast of 25 economists in a Bloomberg News survey was for a 0.2 percent increase. Separate reports today showed German factory orders and French exports jumped in May.

The recovery is not yet “guaranteed,” the British Chambers of Commerce said today, as rising unemployment in the U.K. and around the world threatens to prolong the worst global slump since World War II. Today’s U.K. manufacturing report comes two days before the Bank of England decides whether to continue its program of buying assets with newly printed money.

“The story will probably be that the second quarter will be slightly negative for manufacturing,” said Nick Kounis, an economist at Fortis Bank Nederland Holding NV in Amsterdam and a former U.K. Treasury official. “The economy is just getting back on its feet and the recovery is going to be a slow one.”

The pound was little changed against the dollar after today’s report, trading at $1.6183 at 11:15 a.m. in London. It dropped 0.6 percent to 86.38 pence per euro.

Eight categories of manufacturing fell on the month, led by paper, printing and publishing, and by machinery and equipment, the statistics office said. From a year earlier, factory production dropped 12.7 percent.

More Ambition

Charter International Plc, Europe’s biggest maker of welding gear, said on June 10 it will miss 2009 profit targets if last month’s 35 percent drop in European and U.S. sales of welding materials persists. Diageo Plc, the world’s largest liquor maker, plans to close a packaging plant and a distillery in Scotland, leading to 500 job cuts.

Prime Minister Gordon Brown is warning that policy makers mustn’t become too complacent amid evidence that any global recovery will be uneven. While German factory orders rose the most in almost two years and French exports rebounded in May, U.K. unemployment is the highest since 1996 and the U.S. jobless rate is the worst since 1983.

Brown, struggling in opinion polls less than one year before the next election, said yesterday the Group of Eight nations must be “more ambitious” in helping their economies. Laura Tyson, an adviser to President Barack Obama, said today the U.S. should consider drafting a second stimulus package.

Output Drop

Brown’s government has tried to support manufacturing with measures such as a “scrappage” plan, which offers consumers a 2,000-pound ($3242) subsidy to trade in old vehicles for new ones. Ford Motor Co., the top car seller in the U.K., delivered 4 percent more cars in June, with 28,657 vehicles registered, the Society of Motor Manufacturers and Traders said yesterday.

Overall industrial production fell 0.6 percent in May, the statistics office said. Economists forecast a 0.2 percent increase, according to the median of 28 predictions in a Bloomberg News survey.

The U.K.’s gross domestic product will probably fall 4.3 percent this year, the Organization for Economic Cooperation and Development said on June 24. That compares with a 4.8 percent drop in the euro area and a 2.8 percent decline in the U.S.

The Bank of England will make its next decision on monetary policy on July 9. In a Bloomberg News survey of 36 economists, 20 said the bank will stick to its current plan to buy 125 billion pounds worth of assets, while the remainder said it will extend the program.

The BCC said today that the central bank should seek to spend more than the total of 150 billion pounds authorized by the Treasury.

To contact the reporter on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net.

Last Updated: July 7, 2009 06:24 EDT