Industry shows surprise recovery in July

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The Independent Online

A surprise recovery by the manufacturing sector last month handed last-minute ammunition to the interest-rate hawks on the Monetary Policy Committee ahead of their decision tomorrow. Growth in the beleaguered sector accelerated slightly in July to its highest rate since January, according to a survey published yesterday.

A surprise recovery by the manufacturing sector last month handed last-minute ammunition to the interest-rate hawks on the Monetary Policy Committee ahead of their decision tomorrow. Growth in the beleaguered sector accelerated slightly in July to its highest rate since January, according to a survey published yesterday.

In its report - the first authoritative data for July - the Chartered Institute for Purchasing and Supply said growth was mainly driven by rising UK orders, but export orders also rose, for the first time since March. The CIPS index, based on a survey of 620 companies, rose to 51.8 from 50.4 on a scale where any number above 50 represents expansion.

The figure was much stronger than the City expected. It follows string of gloomy reports from industry groups and individual businesses. Sterling rallied by as much as a cent against the dollar as the market speculated that the MPC may raise rates sooner than thought.

CIPS found that output and orders rose, while there were signs of increasing inflationary pressures in the sector and a worsening of supply-side bottlenecks. The cost of raw materials rose for the 12th successive month, at the fastest rate for three months.

Ciaran Barr, chief UK economist at Deutsche Bank, said: "The survey is supportive of our view that the Bank will raise rates on Thursday, but the manufacturing sector is still not out of the woods." However, most analysts expect no change.

The CIPS report appears to contradict a survey by the Confederation of British Industry last week that showed business confidence at its lowest since the end of 1998 and orders falling at their fastest rate for a year.

However, it was more in tune with a report last week from the Institute of Directors that exports were at a three-year high.

A panel of economists set up to "shadow" the MPC urged the Bank to leave rates on hold. The committee, which met before yesterday's data was published, said rates were at or close to their peak at 6 per cent.

Four out of seven - Peter Spencer, Peter Warburton, Roger Bootle and Patrick Minford - argued for a bias towards future rate cuts. Sir Alan Walters argued for a neutral bias, while David Smith and Tim Congdon saw a need for more rate hikes.

Support for the interest-rate doves came from the latest house-price survey from Nationwide. The UK's largest building society said yesterday that prices fell by 0.2 per cent in July, taking the annual rate of inflation to 13.9 per cent compared with 15.1 per cent in June.

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