Industrial output falls sharply

Economy: Slowdown provides Clarke with excuse to cut rates again as homeowners benefit from ongoing market revival

Industrial output fell by more in June than at any time since mid-1992, at the tail-end of the recession. The unexpected drop will give Kenneth Clarke the perfect excuse to cut interest rates again, City economists said yesterday, although few think the economy needs any further stimulus.

Indeed, separate figures showed a further increase in the growth of cash in circulation in July, confirming the surge in consumer spending.

The weak figures for both manufacturing output and total industrial production are puzzling in the light of the renewed optimism revealed by recent business surveys.

The Office for National Statistics said the trend in manufacturing was flat for the seventh month running in June.

Manufacturing output fell 0.3 per cent in the month and was unchanged in the three months to June against a year earlier. A sharp fall in energy production between the colder-than-average May and warmer-than-average June took total industrial output 1.1 per cent lower. It grew 1.1 per cent year-on-year in the second quarter.

Some analysts suggested that the gap between the disappointing output figures and recent buoyant survey results might be due to de-stocking.

James Barty, of the investment bank Deutsche Morgan Grenfell, said: "If the drop in output is due to manufacturers getting excess stocks into line, that will be good news for the economy."

Kevin Darlington at Hoare Govett said the recent survey evidence of an upturn in industry was compelling. "All the surveys are pointing in the same direction. Manufacturing will not stagnate into the foreseeable future," he said.

This view was shared by the Treasury minister Angela Knight: "Although manufacturing was flat in the second quarter all the main surveys suggest that output has started to pick up."

The drop in June was spread across the board, although particularly pronounced in electricity and gas. However, official statisticians stressed the volatility of the monthly figures and emphasised the flat three-month picture.

Output of the petrol refining and nuclear fuels industry fell by nearly 10 per cent in the second quarter, and there were also small declines in basic metals and "other" manufacturing.

The strongest gains during the quarter were made in textiles, chemicals and food, drink and tobacco, which make up nearly one-third of the manufacturing total while the key engineering sector increased production by 0.4 per cent.

The buoyancy of the demand side of the economy was highlighted by separate figures from the Bank of England showing that the 12-month growth of notes and coins in circulation edged up to 7.1 per cent last month from an already robust 7 per cent in June.