Output fall may provide breather on interest rates breather on interest rates

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The Independent Online
The strength of Britain's economic recovery was called into question yesterday by a surprising fall in industrial output in November. The City concluded that Kenneth Clarke, the Chancellor, would hesitate over another interest rate rise with this new evidence of a slowdown in industry coming on top of weakness on the high street and in the housing market. Gilts prices rose on the news.

The Treasury said the figures suggested that growth was slowing to a more sustainable pace. Minutes of the 7 December monthly meeting between the Chancellor, and Eddie George, Governor of the Bank of England, also published yesterday, showed that excessive output growth earlier last year had been the main reason for the subsequent half-point increase in base rates.

Total output fell by 1 per cent in November after adjusting for normal seasonal patterns. Manufacturing production fell by 0.7 per cent, the biggest one-month fall since mid-1993, taking it to a level 1.2 per cent below its peak in 1990.

The unexpected fall was partly because warm weather reduced energy demand. Electricity, gas and water supply fell 7.6 per cent. Lower manufacturing output explained the rest of the decline.

Several sectors within manufacturing reported weaker figures, but the biggest falls were in the engineering and food, drink and tobacco industries. Output of confectionery and soft drinks was down. Within engineering the weakness was spread across several categories, including computers and electronic components.

The November fall came after two strong months. Taking the three together, manufacturing output was 0.8 per cent higher than in the previous three months, while total industrial production rose 1.1 per cent. The Central Statistical Office said it had revised its estimate of the trend annual rate of growth in manufacturing down from 5.5 to 4.5 per cent.

City interpretations of the November fall were cautious. David Owen, UK economist at Kleinwort Benson, said: ``This is not the end of growth in manufacturing, but it does cast doubt on the absolute strength of the recovery.''

Most City commentators thought the figures would reduce fears of another base rate increase, and the financial markets reacted cheerfully. Gilts rose about half a point initially.

Kevin Darlington, an economist at Hoare Govett, said: ``This news on industrial production has clear implications for the discussion at the next monthly monetary meeting. It is very helpful on interest rates.''

However, the Governor and Mr Clarke will have figures on pre-Christmas retail sales, factory gate and retail prices, and national output in the fourth quarter of last year to chew over at their next meeting on 2 February. There will also be more evidenceon whether earnings are picking up, with January the most important month for pay settlements.

At the 7 December meeting, Mr George, recommending a rate rise, said the main news since the previous meeting had been sizeable upward revisions to the estimate of gross domestic product in the third quarter. He also cited the strength of industrial production in October.

Mr Clarke agreed, although both he and the Governor pointed out that consumer spending and the housing market were subdued. The need to keep ahead of financial market expectations tipped the balance.