Hopes of rate cut rise as output falls

Manufacturing decline fuelled by lower car production

DIANE COYLE

Economics Correspondent

Hopes of a base rate cut by Christmas were boosted yesterday by figures showing an unexpected drop in manufacturing output in September.

The news of the decline, partly due to sharply lower car production, came as Ford announced that it has shut down production at its Halewood plant on Merseyside this week because of the slump in the home and export markets, and might impose another week-long shutdown later this month.

''If the Budget is as tough as we expect, interest rates could be cut soon after 28 November," said Simon Briscoe, UK economist at Nikko Europe. However, most analysts believe the Bank of England will not have changed its inflation prediction in its quarterly Inflation Report tomorrow. If so, the governor is unlikely to accept the case for a fall in base rates.

''I do not think we will get the message that the Bank would be happy with lower interest rates,'' said Robert Barrie, UK economist at BZW. ''If so, the Chancellor would have to overrule the governor.''

Adam Cole of brokers James Capel said: ''The debate about base rates will not be resolved until we see whether we have simply a pause in growth or a slowdown.'' Financial market reaction to the Budget would also be crucial, he added.

The disappointing figures for manufacturing output - back at its lowest level since April - raised fears that growth is becoming worryingly sluggish. Although the Treasury said the economy was growing at a sustainable rate, the Central Statistical Office yesterday said trend growth in manufacturing had slowed to 0.5 per cent, compared with 1 per cent in August.

Manufacturers are probably cutting output to reduce their inventory levels, which had built up strongly in the first half of the year, economists agreed. But opinions differed over how severe the inventory correction might prove. Recent surveys of manufacturing have been more buoyant than the official figures, although the surveys also reveal a slowdown in growth.

Manufacturing output fell 0.6 per cent in September, while August's increase was revised down by half to 0.3 per cent. The decline was spread across most industries. The biggest falls were in engineering and the food, drink and tobacco industry, both down 1.3 per cent during the month, accounting for two-thirds of thefall in manufacturing.

A reversal of strong heatwave-related sales in August explained the weakness in food and drink. Lower car output dominated the drop in engineering. It fell 6.7 per cent in September, while output of car parts and accessories was 3.8 per cent lower. Ian Thompson of the Engineering Employers' Federation said: ''We are disappointed but not surprised.'' Both Ford and GM had reduced output because of high stock levels. Peugeot has had some one- day shutdowns.

Separate figures from the Society of Motor Manufacturers and Traders yesterday showed an 11 per cent rebound in new-car registrations last month, after a weak September.

Manufacturing output grew 0.2 per cent in the July-September quarter, taking it to a level 1.2 per cent higher than a year earlier.

A big increase in energy output helped industrial production rise 0.5 per cent in September. Maintenance work in the North Sea and lower demand for energy during the hot summer had led to an earlier dip. Industrial output climbed 0.5 per cent in the third quarter as a whole, taking it to a level 1.2 per cent higher than a year earlier.

Separate figures on insolvencies from accountancy firm Touche Ross added to concern about the economy's weakness. There were a total of 213 appointments to administration and receiverships last month, compared with 145 in September and 184 in October 1994.