Reporting these upbeat results in its quarterly survey yesterday, the Confederation of British Industry said there was no need for another interest rate cut, and that the pick-up in manufacturing strengthened the case for a cautious Budget.
Andrew Buxton, chairman of the CBI's economic affairs committee, said strong growth in output was not a foregone conclusion. But he said: "The interest rate reductions have, with hindsight, been justified. They have created a situation where people start to feel a bit better and spend more."
City experts shared this cautious optimism. "The survey tells us that manufacturing has turned the corner. The one weak area of the economy no longer seems to need any extra stimulus," said Mike Dicks, UK economist at investment bank Lehman Brothers.
The survey, along with a remarkably successful pounds 2bn gilts auction, helped the pound rise nearly a pfennig to DM2.3108.
Business optimism rose in the four months to July, the first risesince April 1995. The trend in optimism in the CBI survey is one of the best leading indicators of growth in the economy.
A balance of 6 per cent of manufacturers said output rose rather than fell in the four months to July, compared with a zero balance in the April survey. The balance of manufacturers expecting output to increase in the next four months rose from 12 per cent to 22 per cent, the strongest figure recorded in a quarterly survey since October 1988.
Orders have improved, but more slowly than respondents expected. Domestic orders were virtually flat, although there was an increase in the consumer goods sector. Export orders picked up modestly. As with output, both home and export orders are expected to pick up sharply. But Mr Buxton warned that manufacturers' expectations have been disappointed for the past year.
Activity is picking up, but prices fell in the latest four months for the first time in more than two years. Firms expect domestic prices to remain stable, and export prices to fall at the fastest rate since 1961. They also foresee the fastest fall in their unit costs since 1958 during the next four months.
A less rosy aspect of the survey is the finding that manufacturing employment fell faster over the past four months, with 16 per cent of firms cutting jobs - a similar fall is expected in the next four months. Moreover, stocks of finished goods increased slightly.
David Hillier, an economist at brokers BZW, said: "If firms are still adjusting job levels and stocks are still high, we are going to get patchy data for the next few months." Simon Briscoe at Nikko Europe said: "The Chancellor should consider cutting interest rates while manufacturing is this weak."
However, most City analysts concluded yesterday that the improvements recorded in the CBI survey, which follows upbeat surveys from Purchasing Managers and British Chambers of Commerce, rule out a cut in base rates at the end of this month. Only unexpectedly weak figures for retail sales would excuse ignoring the signs of an upturn in manufacturing.Reuse content