Oil surge helps industry outperform services

Growth in the UK's industrial sector outpaced services for the first time in almost seven years, official figures showed yesterday.

Services firms, which make up three-quarters of the economy, grew 0.6 per cent, while industrial production - manufacturing, utilities and North Sea oil and gas, rose 0.7 per cent. It was the first time traditional blue-collar occupations had grown faster than white-collar activities since autumn 1999, the Office for National Statistics said.

At first sight the figures offered hopes that a long-awaited rebalancing in the economy had finally begun, although economists warned it could be short-lived.

The economy grew 0.6 per cent in the first quarter of the year, unchanged from the final months of 2005 and close to the long-run trend growth rate. It took the annual growth rate to 2.2 per cent, in line with the Bank of England's forecasts, which economists said ruled out a cut in interest rates in the immediate future.

Production grew 0.7 per cent on the quarter as the three legs of industry - factories, utilities and North Sea oil and gas - all recorded robust growth. It fell in all four quarters of 2005. The growth was driven by a sharp rebound in oil and gas production after a weather-hit third quarter. This contrasted with a slowdown in growth of the services sector, from 1 per cent to 0.6 per cent. The main culprit was the 0.7 per cent fall in retail sales over the three months to March.

The Treasury is looking for a rebound in investment and exports to helprebalance the economy, the March Budget showed.

On Tuesday, the CBI reported a surge in export orders, particularly in the wake of the economic rebound in Europe. Michael Saunders, at Citigroup, said: "Things may not continue to turn out so smoothly. Some of the rise in production may reflect a rebound in inventories after cutbacks in the fourth quarter. If so, that boost may not last." But Howard Archer, at the analysts Global Insight, said: "We are sceptical that business investment and exports will be able to substantially compensate for lacklustre consumer spending on an extended basis, thereby allowing the economy to rebalance significantly."

The economy relied on business and financial services, which make up 26 per cent of the economy, to contribute half of the 2.2 per cent annual growth. "One-quarter of the economy is having to do half the work," one analyst said.

City economists said with GDP growth close to trend, there was no reason for the Bank to cut interest rates. "The Monetary Policy Committee will remain on hold [at 4.5 per cent] before a small nudge up in rates in early 2007," Allan Monks, at JP Morgan, said.