The monthly survey of purchasing managers in industry showed that fears of recovery being derailed by the strong pound are, so far, unfounded.
The index of activity picked up in April. Output and home orders increased sharply because of booming demand. Export orders continued to increase, although at a slower pace than the previous month.
The FTSE 100 index ended 9 points higher at 4,445. A bout of election- day nerves hit currency traders, however.
The pound fell more than a pfennig to just over DM2.79 as the markets were swept by an after-lunch rumour of exit polling showing the Conservatives ahead in marginal constituencies.
The resulting bout of jitters was explained as fear of a hung parliament and all the resulting uncertainties. A drop in the dollar also helped push the pound lower. But one analyst said, definitely off the record: "We are all such Tories here that we just want to believe the Government can snatch victory from the jaws of defeat."
Another said: "People keep saying the market has discounted a Labour government. But if the Tories are wiped out, there will be a knee-jerk reaction."
Most of the big securities houses in the City were open throughout the night to deal with business from overseas investors as the result of the general election unfolded. Deals transacted in the small hours will be disclosed this morning.
Yesterday's economic figures concentrated the minds of City economists on the possibility of a rise in interest rates shortly after the election. David Owen at Kleinwort Benson said: "In a perfect world we would have tax increases to hold back consumer spending, but as it is, the markets are looking for an increase in interest rates."
The next meeting between the Governor of the Bank of England, Eddie George, and the incoming chancellor is scheduled for 7 May, but some analysts speculated it could be postponed after a Labour victory. But even if this did happen, and there was no indication that it would, the Bank of England's inflation report is due to be published on 13 May and is still expected to call for an increase in the cost of borrowing.
The purchasing managers survey showed that the pound's strength had not yet damaged the recovery in industry, with weakness on the export front offsetting overheating in the home market.
Peter Thomson, director-general of the Chartered Institute of Purchasing and Supply, said: "This appears to be an almost perfect scenario for the manufacturing economy." There was steady growth without inflationary pressure.
"The strong pound has stifled demand just enough to keep a lid on things," he said.
The index of activity in manufacturing increased slightly to 53.1 in April, with an increase in output and orders behind the improvement. The output index was almost unchanged at 56.2, well above the "break-even" level of 50.
Growth in export orders slowed while growth in home orders more than compensated for it. The index for total orders was 55.3, close to its average for the past few months.
At the same time, the prices index was unchanged at 40.5, meaning that prices paid for materials have now been falling for 18 months. "There are no inflationary pressures or capacity constraints," Mr Thomson said.
Other recent indicators have shown that the economy outside manufacturing is expanding at a far faster pace. In the first quarter of this year national income, the widest available measure, grew by 1 per cent thanks mainly to booming service industries.
Yesterday Halifax reported that house prices rose 0.3 per cent last month, almost the same as the increase reported by Nationwide Building Society earlier in the week. It reported a decline in the annual rate of house price inflation to 6.6 per cent from 7.2 per cent in March.
Halifax said London was seeing the sharpest price rises. It described price increases elsewhere as "moderate".
The split in the economy between industry vulnerable to a downturn in exports due to the strong pound and a booming consumer and service sector has divided City experts. Simon Briscoe at Nikko Europe argued that an increase in base rates would hurt industry, and said the next chancellor should leave them unchanged.
"Labour has a marvellous opportunity. They have a following wind here in the City," he said. Jonathan Loynes at HSBC Markets said the economy needed a post-election rate rise like a hole in the head.
But David Bloom at James Capel said yesterday's survey showed that sterling was not about to drag the economy into recession.
"Doing nothing would be terrible. In the real world, they can't raise taxes for political reasons so they must at least put up interest rates," he said.Reuse content