Manufacturers benefit from increased spending

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Manufacturing industry is at last starting to enjoy the trickle-down benefits of the consumer recovery, according to new survey evidence.

Separate figures yesterday suggested consumer spending is still gathering steam, with the growth in cash in circulation returning last month to its fastest pace since January 1989. Halifax Building Society confirmed that house price inflation in August picked up to its highest since the housing bubble burst in 1989.

Some City experts concluded that the Chancellor, Kenneth Clarke, would have to resist the temptation to cut base rates. Others predicted he would slip in another reduction - perhaps after tomorrow's meeting with Eddie George, Governor of the Bank of England.

"A cut in rates before it is too late cannot be ruled out, even though the economic case is very flimsy," said Paul Mortimer-Lee, chief economist at Paribas.

The signal that recovery is under way in manufacturing was provided by the purchasing managers' survey. Its activity index climbed to 51.9 in August, its highest in a year and comfortably above the 50 watershed between growth and recession.

The Treasury welcomed it as an indicator of "brighter prospects" in manufacturing. The increase could be echoed by an improvement in the official figures for manufacturing output, so far stubbornly weak. Mr Clarke and Mr George are likely to have a preview of the industrial output statistics.

Yesterday's survey suggested that consumer demand is filtering beyond the consumer goods industries to intermediate industries. These saw a sharp fall in their stocks of unsold goods for the third month running. Consumer industries have started re-building stock levels.

"This is a clear signal that the excess stock levels which have haunted manufacturing this year are over," said Sean Shepley, an economist at CS First Boston.

Overall, output rose sharply last month while new orders remained at a high level. Employment changed little, hovering near the 50 mark. The prices index picked up but remained extremely low by past standards.

Peter Thomson, director general of the Chartered Institute of Purchasing and Supply, said: "Although growth is well below the levels we saw in 1994, it is heartening to see a gradual upturn in activity."

Separate figures yesterday brought further signs of faster consumer spending. Cash in circulation, the biggest component of the narrow money supply measure M0, expanded by 0.8 per cent in August, taking its annual growth up to 7.5 per cent from 7.1 per cent in July. The use of cash has not grown as rapidly since the late 1980s boom.

There was also confirmation that the housing market recovery is gathering pace. Halifax reported a 0.5 per cent rise in prices last month, the same as in July. Year-on-year house price inflation climbed to 5.7 per cent - similar to the 5.4 per cent reported by Nationwide Building Society last week.

Most economists believe the economy is in no need of further stoking. "Manufacturing is going to get a lot stronger in the course of the next 12 months," predicted Robert Barrie at BZW.

A minority believes low inflation means lower interest rates would be warranted.

Simon Briscoe, an economist at investment bank Nikko, said: "It is easy for the Chancellor to make a case for cutting rates again. Inflation is falling and the economy is still growing below trend."