Manufacturing output in December dropped by 0.2 per cent, the first annual decline for over two years. The unexpectedly poor performance of the manufacturing sector revived hopes in the City of further rate cuts.
Kenneth Clarke meets Eddie George today to decide upon interest rates but after the Chancellor's surprise rate cut in January, a further reduction is generally regarded as unlikely. However, this fresh evidence of weakness in manufacturing made the City more optimistic about subsequent rate cuts.
"A cut in March looks entirely plausible," said Ian Shepherdson, UK economist at HSBC Markets. "If manufacturing catches a cold, the rest of the economy can catch flu." That is one thing the Government cannot afford near an election.
The equation between weak manufacturing and swift reductions in interest rates is generally shared in the City. The short sterling market used to speculate on future rates closed with the expectation that they would be cut by almost half a point by June.
December's fall in manufacturing output was 0.7 per cent over the month, and the initial estimate for November was revised down to show a drop of 0.1 per cent. The sharp decline shocked the City, which had been anticipating a small monthly increase.
As a result, the Central Statistical Office revised down its trend rate of growth for manufacturing from 0.5 per cent a year to zero. It also changed its estimate of trend growth in industrial production from one to half a per cent.
Industrial production actually rose by 0.4 per cent in December, as cold weather boosted demand for heating. However, the the City focused on manufacturing output, which accounts for more than 80 per cent of industrial production and more than a fifth of national output.
With the exception of chemicals, manufacturing fell across the board in December as industrialists sought to reduce excess inventories built up in 1995. The key engineering sector posted a fall of 0.5 per cent after two months in which it had been growing. Food, drink and tobacco fell by 0.9 per cent.