The Central Statistics Office raised its estimate of trend growth in manufacturing to 5 per cent a year, reflecting the fastest growth over a 12-month period since 1989.
The Chancellor of the Exchequer and the Governor of the Bank of England meet today to discuss whether interest rates should rise to take the steam out of the recovery, but despite the factory output figures they are expected to leave rates unchanged.
City analysts expect subdued August car sales figures, also announced yesterday, to strengthen the Chancellor's resolve not to raise base rates yet as there is little hard evidence that economic recovery is pushing inflation higher.
However, Bowater, the paper and packaging company, warned that it was passing on big rises in raw material costs to its customers, which could put up food prices in the shops. The Governor may argue that this shows inflationary pressures are beginning to stir.
The FT-SE index of 100 leading London shares fell 36.1 points to 3,205.4 in thin trading. Share prices were undermined by the weakness of gilts, which fell in line with overseas bond markets. The European Union's monetary committee added to the nervous mood by agreeing to censure 10 of the EU's 12 governments for the state of their public finances.
Falling oil and gas production in July offset the 0.4 per cent rise in factory output to leave industrial production just 0.1 per cent higher in July than in June. But the CSO also revised up its estimates of industrial production in the first and second quarters of the year, providing further evidence that its early estimates are underestimating the strength of economic recovery.
Factory output in July was 0.7 per cent higher than the provisional estimate of June's output and would have been almost 0.9 per cent higher but for the explosion at the Milford Haven oil refinery. The 1.3 per cent rise in factory output in the three months to July over the three months to April was widely spread.
Rapid growth in output of computers and telephone equipment helped to lift engineering output, while building products also showed a healthy rise. Transport equipment, paper and packaging, mechanical engineering and leather all saw production fall.
The figures continue to show the recovery 'rebalancing', with output of investment and intermediate goods outstripping the production of consumer goods.
'The pattern of recovery seems to be shifting as tax rises cap consumer spending but investment and exports take up the running,' Michael Saunders, economist at Salomon Brothers, said. 'The combination of the low pound and recovery on the Continent is creating an export boom.'
Andrew Cates, of UBS, said: 'Due to trade data problems and the frequency of upward revisions to output data at this point in the cycle, we still suspect that output was under-recorded by the official estimates through the course of 1993 and into this year.'
Economic recovery is helping to boost Britain's competitiveness, according to a report from the World Economic Forum and the International Institute for Management Devlopment.
The report also shows improvements in the competence of senior management, and Britain emerging as one of the strongest industrial economies in terms of its international orientation. Britain ranks 14th out of the 41 countries surveyed, with the US top, Singapore second and Japan third.
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