Borrowing figures lead to new fears for economy

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Consumer borrowing surged while manufacturing industry suffered a jolt last month, raising the spectre of an unbalanced economy just three days before the Bank of England has to set interest rates.

Yesterday's data threw the monetary policy committee's dilemma into sharp focus, showing that recent rises in interest rates had done little to curb consumers' appetite for debt but hurt industry by pushing up the pound, analysts said.

"Raising rates to cool the consumer threatens to drive up sterling and in the meantime blunt any recovery in the trading sector," said John Butler, an economist at HSBC.

Total consumer borrowing rose by £10.64bn in January, the Bank said yesterday, the biggest increase since October and just a few hundred million pounds below September 2003's all-time record.

Consumer credit - borrowing on plastic, overdrafts and unsecured loans - leapt by £1.9bn, dramatically ending the slowdown of the past three months. It was more than double December's £873m and greater than the City's forecast of £1.2bn.

Mortgage lending also rose as homebuyers borrowed £8.71bn in January while December's figure was revised by £1bn to £8.35bn.

But while consumers loaded up with debt, manufacturers drew in their horns, according to a snapshot survey of managers published yesterday.

Activity in the sector slowed sharply with both output and new orders failing to keep pace with the rises seen in December and January, the Chartered Institute for Purchasing and Supply said.

It said solid increases for firms making consumer and capital goods were more than offset by a sharp slowdown in output and a slump in new orders of intermediate goods - component parts.

Roy Ayliffe, a director of Cips, said: "It is possibly a warning sign that this decline might feed through to other parts of the manufacturing side."

He said it was too soon to tell, adding it might simply be a sign that makers of finished goods ran down their stock levels to cut costs in the face of rising raw materials prices.

"If interest rates rise, especially relative to other areas, it will strengthen the pound more and that will hit manufacturing more and it will make life for more difficult for them," he said.