Falling pound fails to spur manufacturing

Hopes that the dramatic fall in the pound against the euro would engineer an end to a two-speed UK economy fizzled out yesterday as manufacturing slumped while house prices surged.

Factory output fell last month, disappointing hopes that the successful outcome of the Iraqi war and a cheaper pound would banish uncertainty and stimulate orders for UK goods.

In contrast, the Halifax said house prices surged at their fastest rate for three months in May.

"House prices may have improved but, so far, the economy's engine room has not," said Martin Essex, a senior economist at consultants Capital Economics.

Analysts said the combined impact of yesterday's news would not be enough to prompt the Bank of England to cut interest rates on Thursday.

It was the sixth successive month of industrial contraction which, if replicated by the official data, would mean the sector had slumped back into recession.

The Chartered Institute of Purchasing and Supply said: "Although the recent strength of the euro was helping to stimulate demand from a number of European economies, the simultaneous depreciation of the dollar had damaged UK competitiveness in other key export markets."

The picture was even gloomier than the City had expected. "These are desperately disappointing figures," said Mr Essex. "The pound's fall against the euro has been of little benefit to exporters so far and there has been little or no improvement in the industrial sector following the ending of the war in Iraq."

This contrasted with a buoyant picture in the housing market where prices rose while growth in mortgage lending hit a three-month high.

Halifax said May's price surge was evidence of a return of confidence following the end of the Iraq war. But it insisted the market was still set for a slowdown.

"The market is going from a gallop to a canter," said Martin Ellis, Halifax's chief economist. "Just because it has come back in May does not mean this pace will carry on."

Halifax said the annual rate had dipped to 22.7 per cent from 23.6 per cent and would hit 9 per cent by the end of the year as a sharp fall in the number of first-time buyers reduced upward pressure on prices.

These forecasts were supported by the Bank of England's figures which showed the number of mortgage applications in April was 97,000 - a contrast to the 120,000 a month witnessed last year.

But total mortgage lending hit a three-month high, indicating consumers were still keen to borrow against the rising value of their home or hunt out cheaper mortgage deals.

"There is no sign that consumers' demand for credit is sated," Michael Saunders, an economist at Citigroup, said. "The [Bank's] monetary policy committee can wait and see for now."