Alf Young on Tuesday: The economic malaise that has already brought the housing market to a virtual standstill and banks to their knees, and is cutting a swathe through high streets and shopping malls, is now knocking on the door of manufacturing, the principal victim in several recessions past.

The economic malaise that has already brought the housing market to a virtual standstill and banks to their knees, and is cutting a swathe through high streets and shopping malls, is now knocking on the door of manufacturing, the principal victim in several recessions past.

Even just a few weeks ago it looked as if, thanks to these earlier traumas, our slimmed-down industrial sector was lean and mean enough to cope reasonably well with anything this downturn might throw at it. But two surveys released yesterday - the CIPS/Markit UK manufacturing PMI and the latest quarterly review from Scottish Engineering - paint a very gloomy picture indeed.

As order volumes collapsed, the UK Purchasing Managers' Index slumped to 34.4 in November, its lowest reading since that data series was first collected at the start of 1992. The monthly fall from October set another record.

Forget the hope that weaker sterling - down another five cents against the US dollar yesterday - would boost UK manufactured exports. Reflecting the global nature of this crisis, companies are reporting lower levels of new work from customers in the United States, mainland Europe and East Asia. All sectors of manufacturing - consumer, capital and intermediate goods - are feeling the chill.

Three Fridays ago, I offered Herald readers a flavour of a discussion I had had on current market conditions with leading members of Scotland's engineering community. What they had told me was surprisingly mixed. Some were struggling, but others sounded confident they could steer a course through current challenges.

However, according to Scottish Engineering's latest reading of its members' mood, things have taken a decided turn for the worse. Order intake, output volume, capacity utilisation and capital investment plans have all turned negative for the first time since 2003. The biggest turnaround is in optimism, heading towards levels of negativity not seen in the sector north of the border since 2001.

The most pessimistic are small and medium-sized engineering companies, perhaps reinforcing the widespread anecdotal evidence that banks have become much tougher in the terms on which they are prepared to maintain credit lines. Peter Hughes, Scottish Engineering's chief executive, certainly thinks so. He claims: "Our SMEs in particular are finding that their bankers are proving to be far from helpful."

Banks, especially those that are now in business only because the state is injecting £37bn as part of the recapitalisation process and countless billions more in fresh liquidity, know they are on the road to modern pariah status if lending practices don't normalise.

But as Steven Hester, the new group chief executive of Royal Bank of Scotland, put it yesterday, those customers seeing increased borrowing costs, even as Bank Rate comes down, need to remember that this is "a necessary reflection of steep increases in our own costs of borrowing" and of the knock-on impact on the incomes of savers.

At the CBI conference last week, drowned out by Alistair Darling delivering his pre-Budget report, the new business secretary Lord Peter Mandelson warned UK banks that, if they tighten their grip on credit, unilaterally reorganise or withdraw overdraft facilities and impose new credit terms without consultation, they will inflict "real damage" on the economy and would be "cutting off their noses to spite their faces".

Mandelson is still trying to establish the facts on current lending practices. He must, however, know that the real damage he talks about will be more businesses, including manufacturing businesses on this latest data, following the likes of Woolworths and MFI into the hands of insolvency practitioners. What's his plan then? Well, on Saturday, in an interview with the Guardian, he sketched in one intriguing gambit.

According to the paper, "Lord Mandelson is drawing up plans to choose which businesses and industries are important enough to be saved in the event of their going bankrupt as the recession bites".

It seems a paper reflecting the business secretary's plans for "a more interventionist policy for industry" has already been put before the UK government's economic war cabinet. According to the Guardian, more detail is promised when his lordship delivers the annual Hugo Young lecture in London tomorrow. At this stage, the only direct Mandelson quote over two-and-a-half pages was this: "They (industry) don't want us to pick winners, but they do want a route map."

We shall see whether it turns out to be the kind of deathbed intervention the Guardian sketched out on Saturday. The only other recent clue was in a little-noticed paper that came with last week's pre-Budget report deluge, on addressing the long-term strategic challenges facing the UK economy. A joint production from the Treasury and Lord Mandelson's department, BERR, it had a familiar ring to it.

It talked about engaging with sectors such as pharmaceuticals, advanced manufacturing, creative industries, low carbon industries and so on. But it had very little to say about a more interventionist approach, putting even more taxpayers' cash behind those companies "important enough to be saved" in the current climate. To be credible, it has to engage with those viable businesses whose optimism is falling off a cliff right here and now.