Exports pick up despite the strength of sterling

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Export orders have improved despite the strength of sterling, according to the latest business survey. This brighter-than-expected picture on the industrial front contrasted with other reports hinting at a gloomier consumer outlook, says Diane Coyle, Economics Editor.

Manufacturers' order books have returned to their healthiest level since August 1995, the Confederation of British Industry reported yesterday. Domestic orders remained strong while export orders picked up from their depressed level.

The CBI said the strong pound was still hitting exports. But it admitted: "The sharp deterioration in order books recorded in the middle of the year seems to have been halted."

The balance of manufacturers surveyed saying overseas orders had risen rather than fallen was minus 29 per cent, a bit less deep into negative territory than November's minus 34 per cent balance. The balance reporting an increase rather than a decrease in total orders climbed to plus 2 per cent from minus 3 per cent. Sudhir Junankar, a CBI economist, said the slight improvement in export demand provided a "welcome breathing space for hard-pressed exporters".

Some City economists were far more upbeat. Adam Cole at James Capel said: "This may be the first sign that the worst is over for exporters."

While others shared the CBI's caution, all agreed that the latest results did little to change the Bank of England's interest rate calculation. If interest rates do increase further, as widely expected, it is unlikely to take place until some time after the New Year when the Bank has more evidence on how fast the economy has expanded in the final quarter of 1997.

According to the monthly CBI survey of industrial trends, the modest improvement in orders did little to boost business optimism. The expected output balance improved a shade to 10 per cent from 9 per cent last month, although the increase would be greater adjusted for the normal seasonal downturn in December.

Manufacturers' expectations of pushing through price rises also increased slightly. But this too reflects the normal seasonal anticipation of raising list prices in the New Year - an expectation which has been disappointed in recent years.

Mr Junankar said the inflation outlook remained very promising. Kevin Darlington, an economist at ABN-Amro, agreed. "Core producer output price inflation should remain muted," he said.

Figures earlier this week showed that the benefits of low inflation at the factory gate had not fed through fully to the high street. Retail price inflation last month remained at a two-year high.

The economy is expected to slow in 1998, but opinions differ as to whether this will be marked enough to make additional increases in the cost of borrowing unnecessary.