Output fall poses rate dilemma

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The Independent Online

Economics Correspondent

A fall in industrial output in May presented Kenneth Clarke, the Chancellor, with an interest rate dilemma yesterday. Weak production provided further evidence that growth has slowed, but prices charged by manufacturers are starting to pick up.

May was the second month in succession that output fell, dropping to a lower level than it had reached last September. Its trend growth is the slowest since the start of 1993, according to the Central Statistical Office. However, core factory gate inflation last month reached its highest rate in four years.

Paul Mortimer-Lee, chief economist at Paribas, said: "Mr Clarke faces a real policy dilemma." Most analysts do not expect a rise in base rates yet, reckoning Mr Clarke will wait and see what a few more months' figures bring - although most also believe the Governor of the Bank of England, Eddie George, will continue to advise an increase.

Stephen Hannah, head of research at IBJ International, said: "A rise in base rates now is extremely unlikely." David Hillier at NatWest Markets said the retail price figures due out tomorrow could tilt the balance. Higher-than-expected inflation on the high street would strengthen the case for a rise.

Many City economists are suspicious of the weak official output figures, partly because employment in industry has been expanding at a rate normally seen only during a boom, and partly because surveys of industry have painted a far more buoyant picture.

The Confederation of British Industry is providing the CSO with its survey details so that the official statisticians can try to solve the puzzle of the gap between the two indicators of industrial health, although the latest CBI survey pointed to output growth tailing off.

Yesterday's official statistics showed an increase in electricity, gas and water production, up 2.9 per cent in the three months to May. But manufacturing output fell slightly in the month, and rose only 1.6 per cent in the three months to May. It has not yet regained its mid-1990 peak.

The biggest output decline occurred in the metals industry, mainly because of lower iron and steel production. There has also been a significant fall in the output of the textiles, leather and clothing industry. It was concentrated in clothing, with lower production of garments.

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