Output growth knocks hopes of rate cut

PAUL WALLACE

Economics Editor

A bigger than expected bounce-back in manufacturing output in August quelled some of the hopes for an early cut in interest rates. Although the jump in output took manufacturing back to its previous record high in March 1990, the annual rate of growth continued to fall to 1.3 per cent.

Manufacturing output rose by 0.6 per cent in August, double the monthly increase the markets had been expecting. The decline in July was also revised down from 0.4 to 0.2 per cent.

"On this data it is less likely that the economy is moving into recession and that rates will need to be cut to prevent this," said David Hillier, UK economist at NatWest Markets.

Movements in the short sterling contract used by the City to bet on future interest rates showed that the markets agreed with this assessment, with the implied rate of interest in December rising from 6.55 to 6.60 per cent.

Half the increase in manufacturing in August came from engineering which grew by 1 per cent in the month. A further sixth came from food, drink and tobacco which grew by 0.8 per cent in the month.

Falls in oil and gas extraction and the output of the utilities meant that the broader but more erratic industrial production index was unchanged.

Despite this short-term picture of stagnation, the Central Statistical Office raised its estimate of the trend rate of growth of industrial production to 1.5 per cent from the 1 per cent it had calculated last month.

The latest figure may have dispelled some of the worst fears about a drop in manufacturing, but the unusually hot summer played its part. Increased output of beer and soft drinks accounted for a third of the 0.3 per cent increase in manufacturing output in the three months ending August compared with the previous three months.

Concern about the buoyancy of the economy was cast by the latest reading of the longer leading indicator of the UK economy which declined again in August to its lowest level since January 1991.

The index which tends to lead the economy by just over a year has now been falling since June 1994.

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