Growing demand boosts factory output

While the UK's financial services sector is suffering from the continuing crisis in credit markets, when it comes to the old-fashioned business of making things, Britain's manufacturers are continuing to enjoy healthy growth.

According to the latest survey from the EEF, the manufacturing sector, which accounts for about 15 per cent of the British economy, has strengthened over the past three months, with both export and domestic order books improving, and all regions and industries seeing positive conditions.

The survey showed the highest output and order balances since the first quarter of 1995. Motor vehicles recorded the best balance at 42 per cent, indicating that its recovery is gathering pace as expected.

There was a significant increase in investment intentions, and a further rise in the number of companies recruiting or planning to do so. The figures are much in line with other recent evidence.

Demand from emerging economies, especially China, and the effects of the post-2000-2001 downturn in spurring efficiency gains, are thought to be two factors behind the progress in manufacturing.

By contrast, the service sector – particularly businesses in travel and leisure – is feeling the squeeze from recent interest rate rises, according to the latest CBI/Grant Thornton survey. Firms selling services such as holidays and flights, or fitness and beauty treatments, were worst hit over the past three months. The only consumer services sector to have had a positive quarter was hotels, bars and restaurants, which recorded a good rate of growth.

There was strong demand for professional services to businesses, such as accountancy, law and property, which had a buoyant quarter with strong business volume and value growth.

Ian McCafferty, the CBI's chief economic adviser, said: "A combination of higher household borrowing costs and poor weather has put a dampener on consumers' spending over the last three months. Consumer services firms don't expect to expand their businesses in the coming year. Costs are expected to continue growing at a rapid rate, with less scope for firms to raise prices, which will inevitably put profit margins under greater strain."