Output dip casts doubt on prospect for rates rise

Manufacturing output fell unexpectedly in November but retail sales bounced back in December. The continuing mixed signals on the economy left expert opinion as divided as ever about whether or not interest rates will rise next month. Diane Coyle and Nigel Cope report.

There was support for almost any view about the British economy's prospects from yesterday's batch of surveys and statistics. Official figures showed that industrial production fell by an unexpectedly steep 0.6 per cent in November. Much of this was the fault of warm weather cutting energy output, but manufacturing also declined by 0.4 per cent.

Although its annual growth rate remained unchanged at 1.5 per cent, manufacturing has been virtually flat since July. The sector makes up just one-fifth of the economy, but its weakness suggested that fourth-quarter GDP will show a slowdown.

Analysts said yesterday's disappointing figures indicated the impact of the strong pound on exports. For the first time higher value industries such as engineering, which do not compete on price alone, were starting to slow down markedly.

Separate figures for prices paid by manufacturers for materials and charged by them at the factory gate showed that inflationary pressure at the start of the prices pipeline remained extremely subdued in December.

However, there was evidence that profit margins might have increased. Producer output prices jumped 0.4 per cent last month, taking their year- on-year change up a shade to 1.0 per cent. Prices paid for inputs fell 1.4 per cent during the month to a level 9.5 per cent lower than a year earlier.

Economists said some companies were using strong demand at home partially to offset the squeeze on profit margins. But figures for retail price inflation, due today, are expected to show a small fall in the target measure.

There was more evidence for the strength of home demand in the latest survey of the high street. The British Retail Consortium reported a surge in December sales after a weak November.

Sales rose 7.9 per cent last month, according to the survey, or 4.8 for a like-for-like basis, compared to just 4.4 per cent (1.1 per cent like- for-like) the previous month.

The figures showed a month of two halves with sales in the first two weeks continuing at November's weak level before a last minute surge in the last week before Christmas. Sales were particularly strong in the final four shopping days.

Next, the high street and mail order fashion group, provided further cheer for the retail sector with better than expected figures. It said retail sales in the 31 weeks to 24 December were16 per cent higher on 11 per cent more sales space.

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