Signs of upturn dash hopes of rate cut

HOPES OF another cut in interest rates faded yesterday after a clutch of data and surveys pointed to an upturn in the economy.

Manufacturing industry mounted an unexpected recovery in March. Factory output rose 0.3 per cent, against City forecasts of a 0.2 per cent fall. This left an annual decline of 1.3 per cent, better than the expected 1.7 per cent fall. Industrial production, including mining, energy and utilities, rose by 0.2 per cent, beating a forecast 0.2 per cent decline.

The Office for National Statistics said the trend for annual manufacturing growth was now minus 2 per cent, against minus 2.5 per cent in February.

The strong performance means there is unlikely to be a downward revision to the 0.1 per cent provisional estimate for first-quarter GDP.

The National Institute for Economic and Social Research said the economy grew by 0.2 per cent in the three months to April on the previous quarter.

The independent think tank said the forecast was consistent with the view that the economy had narrowly avoided a period of falling output. "We regard these figures as consistent with our forecast that output should grow at just over 1 per cent in 1999. They do not make a case for further interest-rate reductions," the NIESR said

A regional survey from the Confederation of British Industry highlighted a split between a successful domestic consumer products sector and suffering export-based manufacturers.

Manufacturers in the South-east and East were more optimistic since the previous survey - a result of concentrating on consumer goods rather than heavy industry.

A survey of UK fund managers by Merrill Lynch Gallup found 95 per cent expected the economy to be stronger in a year, against 3 per cent in September.

Sterling rose on the economic data, after falling in response to a survey highlighting a surprise fall in retail sales last month.

Today the Bank of England publishes its quarterly inflation report, which is expected to amplify concerns about the exchange rate.

Neil Parker, an economist at Royal Bank of Scotland, said the economy was more resilient than the Bank of England had given credit for. "The economy does not need any further cuts in the UK repo rate."

But Dharshini David of HSBC said: "Further falls in output and employment could be on the cards as the strong pound continues to squeeze the export- dependent manufacturing sector.