Surge in activity fuels rate rise fears

Manufacturing growing strongly. Retail sales hit 14-month high. Mortgage approvals rise
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The Independent Online

Hopes of a cut in interest rates were dealt a fatal blow yesterday by figures showing a synchronised rebound in factories, high streets, the housing market and the City of London.

Manufacturing output, mortgage approvals and retail sales all hit multi-month highs while takeover activity was at its strongest since the peak of the "dot-com" boom.

The raft of upbeat figures backed Gordon Brown's forecast of a strong economic revival, offsetting a run of bad news for the Government over the last week.

Tony Blair hailed the economic performance in a speech before tomorrow's local elections: "This economy today is stronger with low mortgages, low unemployment and more jobs." One Brown aide said a robust economy was "clearly the weapon in the Government's armoury".

The Treasury forecasts growth of 2.25 per cent this year, followed by two years of GDP growth as strong as 3.25 per cent, above the long-term trend of 2.7 per cent.

The financial markets moved to price in a rise in interest rates as the next move. "Today's UK data all came in above expectations, pointing to a reasonable growth outlook for the rest of the year," said Michael Taylor, an economist at Lombard Street Research.

According to the CBI, retailers reported their first annual rise in sales for 14 months in April. The balance of shop owners reporting sales up outnumbered those seeing a fall by 2 per cent.

There were separate signs of consumers' optimism from a rise in the number of mortgage approvals, which predict house prices a couple of months ahead.

Britain's high street banks approved 85,698 loans in March, up 33 per cent on a year ago, compared with February's 22 per cent annual increase.

"A strong housing market should support confidence and provide some modest support to retail spending," said Andrew Smith at the Royal Institution of Chartered Surveyors.

Meanwhile, a snapshot survey of factory managers showed the sector grew at its fastest rate for 17 months in April. The Chartered Institute of Purchasing and Supply (Cips) said factories had reported rises in orders from both the UK and overseas and had taken on more staff for the first time in more than a year. "After months of disappointing performances, managers noted a long-awaited recovery in the UK manufacturing sector," said Roy Ayliffe, a director at Cips.

Last week, official figures showed that manufacturing grew 0.5 per cent in the first quarter, while the CBI said factories had reported a rise in optimism and output in the three months to April.

Analysts said it showed that four consecutive years of global GDP growth above 4 per cent had finally benefited UK exporters. "A rising global ride lifts all boats - even HMS UK," said Danny Gabay, at Fathom Consulting.

Finally, the value of takeovers of British firms by foreign companies picked up sharply in the first three months of this year to its highest since the third quarter of 2000.

The Office for National Statistics said spending by foreign companies on acquisitions in Britain soared to £19.4bn from £15.5bn in the last quarter of 2005.

"The rise in M&A inflows to the UK probably reflects the combination of strong global activity and the UK's openness within Europe," said Michael Saunders, UK economist at Citigroup.

The pound hit a one-month high against the euro and interest rate futures extended losses as investors priced in a higher chance of rates rising this year.

James Knightley said the hawks on the Bank of England's monetary policy committee were moving "into the ascendancy", adding: "Some on the MPC may starting to think about raising rates later this year."