Relief for industry as pound takes a knock

There was relief for manufacturers yesterday as sterling dived more than three pfennigs against the mark to its lowest level since early February. The drop followed remarks by Howard Davies, Deputy Governor of the Bank of England, who said financial markets were expecting a fall in the pound.

New figures yesterday showed that the slow recovery in manufacturing continued in January with no sign the strong pound had hit output anyway.

Eddie George, Governor of the Bank of England, said in a speech last night that sterling posed a dilemma over interest rates, but he repeated the Bank's view that a "moderate" rise was needed to slow domestic demand.

Manufacturing output expanded by 0.3 per cent in January, taking its annual growth up to 1.6 per cent. Output is now rising at the fastest rate for more than a year.

Total industrial output, which also includes electricity, gas and water, North Sea production and mining, was flat. But its year-on-year growth climbed to 2.4 per cent. The sectors which rely most on exports - engineering, cars and chemicals - showed no signs of exchange rate damage.

"These numbers show little evidence at this stage that the stronger pound has hit the export competitiveness of British industry," said Edmund Nonis, an economist at Nikko.

Martin Brookes at Goldman Sachs said surveys pointed to another jump in manufacturing output last month. "Strong domestic demand has had an offsetting effect," he said.

Recent surveys have, however, pointed to a slowdown in the growth of export orders despite the fact that exporters have reduced their prices in a bid to overcome the impact of the strong pound. The Purchasing Managers' Index showed export orders barely increasing, leading some City experts to predict that manufacturing industry will remain fragile.

The Office for National Statistics had revised down output growth at the end of last year. The full year's increase in industrial production was revised up by 0.1 per cent to 1.2 per cent, but the increase in the fourth quarter was revised down from 0.9 per cent to 0.6 per cent.

"That might be enough to take the estimate of GDP growth from just above trend to its trend level," said John O'Sullivan at NatWest Markets.

The size of the quarterly rise in GDP has been one of the decisive factors for interest rates. Revised figures for the fourth quarter are due before Kenneth Clarke and Mr George are due to hold what could be their last monetary meeting on 10 April.

Mr Clarke has also used the strength of sterling to justify turning down the Bank's advice to raise interest rates. The pound ended at DM2.7134, compared with the previous day's close of DM2.7377.