Sterling's reversal fails to ease industry pressure

Britain's beleaguered manufacturers struggled to keep their heads above water last month as a survey yesterday showed output grew at its weakest rate for a year.

Britain's beleaguered manufacturers struggled to keep their heads above water last month as a survey yesterday showed output grew at its weakest rate for a year.

The recent sharp fall in the pound against the dollar and the euro provided little relief to industry, according to the authoritative survey from the Chartered Institute for Purchasing and Supply (Cips).

Output rose last month but at its slowest pace since April 1999. Its index of the sector's health rose to 50.7 from 50.6 in April on an index where a number over 50 indicates expansion.

The slowdown in output was driven by a sharp fall in production by the investment goods sector. Total export orders fell for the second month in a row, while growth in total orders fell.

Despite the slowdown in output and orders, prices paid for raw materials rose sharply in May, albeit at a slower pace than April.

Roy Ayliffe, a director at Cips, said: "There is little sign of growth in UK manufacturing and the strong pound is taking its toll on domestic and export orders. It's a no-win situation at the moment."

The pound soared to a 14-year high against the euro at the beginning of May but fell 7 per cent over the month.

Dharshini David, a UK economist at HSBC, said: "With export orders lagging movements in sterling, exporters seem set for many more months of gloom."

Adam Law at Barclays Capital added: "Overall, manufacturing activity remains weak - today's numbers do not suggest rates will rise next week."

The Confederation of British Industry said the survey supported its call for interest rates to be kept on hold.

Sushir Junankar, a CBI economist, said: "I think it is too early to talk about a reduction in rates but may be we are in that zone and it could be soon."

The survey triggered another fall for sterling, which lost more than half a cent against the dollar, dropping as low as $1.4923. It fell to a 19-week low of 62.46p against the euro.

There is a growing consensus that the pound will come under more pressure as the need for rate hikes build in both Europe and the United States.

The equivalent of the Cips survey for the eurozone showed the prices index leaped to a new record on the back of a weak euro, rising oil prices and the recovery in demand.

"It is consistent with the ECB having to raise rates again to ensure that the influence from rising prices is contained further out," said one European analyst.

There was a measure of relief from the United States survey which showed a slight slowdown in manufacturing growth and a sharp drop in prices paid for raw materials - although the index was still at worryingly high levels.