Industry orders rebound, but CBI warns on sterling

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The Independent Online

The manufacturing recovery is gathering strength, with orders rebounding at their fastest rate for nine years, according to an upbeat assessment from the CBI.

The manufacturing recovery is gathering strength, with orders rebounding at their fastest rate for nine years, according to an upbeat assessment from the CBI.

However, the employers' organisation also said exports were being held back by the strength of the pound, with companies reporting much lower than expected growth in orders.

The conflicting pointers will add to the Bank of England's dilemma when it meets next month to decide whether to raise interest rates. The pace of recovery in manufacturing suggests the Monetary Policy Committee could afford to increase base rates but this could be at the expense of strengthening sterling still further, to the disadvantage of exporters.

According to the CBI's latest quarterly industrial trends survey, the balance of companies expecting orders to rise is the highest since April 1995. This conflicts with figures from the Office of National Statistics showing that manufacturing is continuing to contract.

But the CBI also said the strong export growth that many companies had expected to see coming through over the past three months had failed to materialise. A balance of just 3 per cent reported higher exports compared with the 17 per cent who had anticipated an increase in orders three months ago.

On a more positive note, exporters said they were less worried about the international outlook than at any time since 11 September, 2001.

Ian McAfferty, the CBI's chief economist, said: "The indications in this survey that the manufacturing recovery is taking hold are good news but the initial signs that the strengthening of the pound has affected exports are a concern.

"Given the state of the economy, business recognises that interest rates will have to go up over the next year but the Bank needs to consider the impact of its decisions on the currency."

Meanwhile Ruth Kelly, the Financial Secretary to the Treasury, sought to calm fears that the UK housing market was likely to crash, plunging the economy into recession. Echoing remarks over the weekend by the Chancellor, Gordon Brown, she insisted that the "boom and bust" psychology was a thing of the past and that any correction in house prices was likely to be gradual.

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