Manufacturing output weaker

Economy: Poor figures boost expectations Governor will not push for higher interest rates today

DIANE COYLE

Economics Correspondent

Britain's manufacturing output fell in July, taking it below its level at the end of last year. The news boosted expectations that Eddie George, the Governor of the Bank of England, will withdraw earlier advice to raise base rates at today's monthly monetary meeting with Chancellor Kenneth Clarke. Financial markets now think rates will fall before Christmas.

This expectation helped share prices in London close at a new record high yesterday. The FT-SE 100 index ended at 3,557.7, up 25 points in the day.

Most City of London economists think today's meeting between Mr Clarke and Mr George will not end with a decision to cut rates. But after yesterday's figures, the Governor is likely to retreat from his view rates should rise.''It would be dangerously reckless for the Bank to continue recommending a rate rise after these data,'' said Simon Briscoe, an economist at Nikko Europe.

Manufacturing output fell 0.4 per cent in July from June, and rose 0.2 per cent in the three months to July compared with the previous three months. Over the three months, it fell 0.1 per cent. Despite this disappointing performance, economists are split over the next move in rates. There is no agreement the economy is on the brink of returning to recession.

Sean Shepley, at investment bank Credit Suisse First Boston, said: ''Output has been weak all summer because firms are working off excess stocks. This could be quite a speedy process, but it means inflationary pressures have ground to a halt.''

Other recent statistics have echoed the weakness in industry. Claimant unemployment rose in July for the first time in nearly two years. Retail sales recovered but were still only 1.4 per cent higher than the previous July. Surveys by the Confederation of British Industry and Chartered Institute of Purchasing and Supply suggest the slowdown in industry will continue into the autumn, orders down from earlier high levels.

The black cloud over the housing market shows no sign of dispersing. Such is the gloom that mortgage lenders have spontaneously cut their rates.

Yet the debate over the direction of interest rates - which the Chancellor has described as ''finely balanced'' since he first turned down the Governor's advice to raise them in May - has not tilted definitively in favour of a cut. Apart from the fact that inflation remains above its target, monetary indicators have remained buoyant. In addition, many economists think growth will pick up before the end of the year. Interest rate cuts overseas will help export markets.

David Hillier at NatWest markets, said: ''This slowdown has been engineered and we have ended up exactly where we were meant to be. The Governor will retreat in order to keep his powder dry if a rate rise is needed in the New Year.''

Comment page 17

Still finely balanced?

The case for a cut in base rates

o Manufacturing output has stalled. Other measures of activitity such as GDP and unemployment suggest economic growth has slowed.

o The housing market is still in decline, casting a shadow over consumer spending.

o The boom in commodity prices, which fed through to factory gate inflation, is over.

o Both US and German interest rates have fallen recently, and Japan is expected to cut rates this month.

o The pound has recovered from its May low-point (the sterling index touched 82.7 against other currencies and is back to 84.8).

o Financial markets expect a cut before the new year, and would react favourably.

The case against a cut in base rates

o The economy was meant to slow from an unsustainably high rate of growth. Fears of recession are premature.

o Inflation excluding mortgage interest payments is above its 2.5 per cent target, reaching 2.8 per cent in July.

o Pay settlements have started to climb. This week has brought warnings on pay from Industrial Relations Services, whose survey is monitored by the Treasury, and engineering employers.

o Money supply measures and bank lending have been growing rapidly.

o Tax cuts in the Budget on 29 November would stimulate the economy. City economists expect cuts worth pounds 2-4bn.

o The pound is still nearly 5 per cent lower than at the start of this year (its index stood at 89.0 on 1 January).

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Field Sales Consultant - Financial Services - OTE £65,000

£15000 - £65000 per annum: Recruitment Genius: This is an exciting opportunity...

Recruitment Genius: Loan Underwriter

£18000 - £20000 per annum: Recruitment Genius: This is a fantastic opportunity...

Recruitment Genius: Collections Agent

£18000 - £20000 per annum: Recruitment Genius: This is a fantastic opportunity...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive + incentives + uncapped comms: SThree:...

Day In a Page

The Silk Roads that trace civilisation: Long before the West rose to power, Asian pathways were connecting peoples and places

The Silk Roads that trace civilisation

Long before the West rose to power, Asian pathways were connecting peoples and places
House of Lords: Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled

The honours that shame Britain

Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled
When it comes to street harassment, we need to talk about race

'When it comes to street harassment, we need to talk about race'

Why are black men living the stereotypes and why are we letting them get away with it?
International Tap Festival: Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic

International Tap Festival comes to the UK

Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic
War with Isis: Is Turkey's buffer zone in Syria a matter of self-defence – or just anti-Kurd?

Turkey's buffer zone in Syria: self-defence – or just anti-Kurd?

Ankara accused of exacerbating racial division by allowing Turkmen minority to cross the border
Doris Lessing: Acclaimed novelist was kept under MI5 observation for 18 years, newly released papers show

'A subversive brothel keeper and Communist'

Acclaimed novelist Doris Lessing was kept under MI5 observation for 18 years, newly released papers show
Big Blue Live: BBC's Springwatch offshoot swaps back gardens for California's Monterey Bay

BBC heads to the Californian coast

The Big Blue Live crew is preparing for the first of three episodes on Sunday night, filming from boats, planes and an aquarium studio
Austin Bidwell: The Victorian fraudster who shook the Bank of England with the most daring forgery the world had known

Victorian fraudster who shook the Bank of England

Conman Austin Bidwell. was a heartless cad who carried out the most daring forgery the world had known
Car hacking scandal: Security designed to stop thieves hot-wiring almost every modern motor has been cracked

Car hacking scandal

Security designed to stop thieves hot-wiring almost every modern motor has been cracked
10 best placemats

Take your seat: 10 best placemats

Protect your table and dine in style with a bold new accessory
Ashes 2015: Alastair Cook not the only one to be caught in The Oval mindwarp

Cook not the only one to be caught in The Oval mindwarp

Aussie skipper Michael Clarke was lured into believing that what we witnessed at Edgbaston and Trent Bridge would continue in London, says Kevin Garside
Can Rafael Benitez get the best out of Gareth Bale at Real Madrid?

Can Benitez get the best out of Bale?

Back at the club he watched as a boy, the pressure is on Benitez to find a winning blend from Real's multiple talents. As La Liga begins, Pete Jenson asks if it will be enough to stop Barcelona
Athletics World Championships 2015: Beijing witnesses new stage in the Jessica Ennis-Hill and Katarina Johnson-Thompson heptathlon rivalry

Beijing witnesses new stage in the Jess and Kat rivalry

The last time the two British heptathletes competed, Ennis-Hill was on the way to Olympic gold and Johnson-Thompson was just a promising teenager. But a lot has happened in the following three years
Jeremy Corbyn: Joining a shrewd operator desperate for power as he visits the North East

Jeremy Corbyn interview: A shrewd operator desperate for power

His radical anti-austerity agenda has caught the imagination of the left and politically disaffected and set a staid Labour leadership election alight
Isis executes Palmyra antiquities chief: Defender of ancient city's past was killed for protecting its future

Isis executes Palmyra antiquities chief

Robert Fisk on the defender of the ancient city's past who was killed for protecting its future