Surprise fall in factory output fuels recovery fears

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After a brief flirtation with growth, industrial production slipped back into negative territory in May, adding to fears that economic recovery may stillbe someway off.

Factory output dropped by 0.6 per cent in May, after a 0.1 per cent rise the month before, the Office for National Statistics (ONS) said yesterday. The data belies hopes that the second quarter might see growth in Britain's gross domestic product (GDP), signalling the technical end of recession.

Although the consensus is still that the worst is over following a 2.4 per cent fall in GDP in the first quarter, predictions of speedy recovery are being replaced by apprehensions of a "doubledip" downturn. The influential National Institute of Economic and Social Research (NIESR), which has predicted a return to growth in April and May, revised its estimates for the second quarter down to minus 0.4 per cent yesterday on the strength of the ONS figures. Martin Weale, the director ofNIESR, said: "What we are probably going to see is some months up, some down, as we bounce along the bottom.

There could be another sharp lurch downwards, but at the moment the most likely outcome is stagnation." According to the ONS, total production was pulled down by a 0.5 per centdrop in manufacturing, including a 2 per cent fall in paper, printing and publishing, and a 1.7 per cent drop in the machinery and equipment industries.

Mining and quarrying also performed badly, with output down by 2.1 per cent between April and May. On a quarter-on-quarter basis, total production was down by 1.8 per cent, within which manufacturing was down by 1.2 per cent, mining and quarrying by 2.7 per cent and output of electricity, gas and water by 5.5 per cent.

Weak economic data will increase expectation that the Bank of England's Monetary Policy Committee will leave interest rates at the 0.5 per cent historic low, and could add to pressure for the final £25bn to be added to the quantitative easing programme.

Despite the ambiguous signals from the real economy, there are indications that consumer confidence is improving.

Nationwide's latest monthly index, published today, shows a 0.9 percentage point rise from May to June. Although still conspicuously lower than pre-credit crunch "normal" levels, last month's index was now broadly in line with the same month last year.

Wariness is still running high in the jobs market, although recent data does indicate a slow improvement. Last month,there were weaker falls in both permanent and temporary appointments, says today's Report on Jobs by KPMG. Although permanent placements are still declining, June saw the weakest drop in 13 months, and temporary/contract staff billings fell at the slowest rate since September.

Rising confidence is not translating into higher spending on food. Annual food price inflation was 5.6 per cent, the lowest level for 14 months, according to a British Retail Consortium report published today.