Manufacturing expands but exports decline

The UK's manufacturing sector expanded more than expected last month, although hopes of an export-driven recovery faded, a report showed yesterday.

A snapshot survey of managers at 650 factories showed that an increase in domestic demand supported an increase in overall activity in the sector.

But export orders fell for the first time in eight months and the pace of job cuts accelerated, the Chartered Institute of Purchasing and Supply (Cips) said.

"Overall output growth continues to hold in but clear signs of an upswing in export orders or an easing in labour shedding are conspicuous by their absence," John Butler, the UK economist at HSBC, said.

The Cips survey showed that its overall index of activity rose to 51.7 in January from an upwardly revised 51.3 in December. That was above analysts' forecasts for a reading of 51.3 and the 50 level that separates growth from contraction for the sixth straight month.

Cips said that new orders increased but employment, delivery times and order backlogs - all signs of pent-up demand - all fell in the month. Roy Ayliffe, the director of professional practice at Cips, said: "Managers continue to face significant challenges, with 2006 opening with downcast conditions.

"Factory output remained solid and new orders rose in response to successful marketing initiatives. However, the new year saw the export market enter into decline in the face of strong competition from cheaper overseas producers. In response to difficult operating conditions, manufacturers continued to cut jobs and attempted to pass on costs to customers - a strategy which was only partly successful."

The survey also showed the price of energy and raw materials continued to rise, albeit at a slower pace than in December. But companies continued to pass on their rising costs to customers, with output prices climbing at their fastest rate in almost a year, to show a reading of 53.6 from 52.2 in December. That may worry the Bank of England's Monetary Policy Committee, which has been concerned that rising goods and fuel prices will encourage workers to demand higher wages.

The report said that cost pressures forced many companies to lay off staff, with the employment index edging down further to 46.5 in January - the lowest since August 2005 and the tenth successive month below 50.

But the Standard Chartered economist Gavin Redknap said the continued weakness in export prospects supported the arguments of Stephen Nickell, the only member of the MPC to call for lower interest rates. Mr Redknap said: "Improving growth prospects and some lingering concerns over inflation should keep the Bank from cutting rates any time soon. Yet we remain firmly of the view that the next move in rates will be down."