CBI declares seven-year manufacturing slump over

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The Independent Online

The seven-year slump in manufacturing is finally over, the CBI has declared, as it gave a tacit nod yesterday to an increase in interest rates next week.

Its quarterly survey of the industrial sector showed that factories were in their healthiest state since 1997 with orders, exports and optimism about job prospects all up.

"It leads us to conclude this is a clear turning point for manufacturing," said Ian McCafferty, the CBI's chief economic adviser. "Manufacturing is joining the party we have seen in other parts of the economy."

Output grew for the first time in three years and at the strongest rate in eight. New orders grew at their fastest pace since October 1996, before a surge in the pound precipitated the downturn. Confidence has returned to the factory floor for the first time in 18 months as companies predicted strong growth over the coming three months.

This trickled through to investment and recruitment plans. Employment fell at the slowest rate for almost three years and will slow further in the coming quarter. Companies intend to increase investment in plant and machinery for the first time in six years.

But the CBI sounded a note of caution, saying two-thirds of companies were still working below full capacity, jobs were being lost and competition was keeping a lid on the prices factories could charge.

It said the greatest threat to the recovery would be further volatility on the currency and financial markets - a reference to the 12 per cent jump in the pound's dollar exchange rate in the past six months.

Mr McCafferty said: "The recovery now depends on the positive expectations being realised, so manufacturers will be hoping the Bank continues its gradualist approach." He said it was crucial the Bank of England ran monetary policy to ensure rates peaked at a relatively low level and that any upward moves were well signalled and gradual.

Asked if he would approve of a rate rise on 5 February, he said: "It is fair to say we would not protest."

Nearly all City analysts expect the Bank's Monetary Policy Committee to raise rates by a quarter-point to 4 per cent next week.

However, the Governor of the Bank of England hinted last night that the surge in the pound and the euro against the US dollar could still avert a rise in UK interest rates next week.

Mervyn King told the House of Lords that sterling's average exchange rate against its main trading partners had risen by 1.5 per cent since the Bank published its last forecasts in November.

He told the economic affairs committee the Bank had to decide whether the euro's rise would depress growth in continental Europe - the UK's largest trading bloc.

"For us the big question is whether we think this will mean that despite a potential policy response by the European Central Bank, that the euro area might be slower to recover than we previously thought," he said.