Slowdown takes heat off rates

A marked slowdown in the rate of growth of manufacturing output yesterday relaxed some of the pressures for further interest rate rises, as the markets warmed to evidence of cooling inflationary pressures.

Although manufacturing output rebounded in December after the unexpectedly weak performance in November, the data also showed the rate of growth slowing significantly.

The Treasury seized on the slowing down argument, saying manufacturing growth attained a more sustainable rate in the final quarter of last year.

Kenneth Clarke, the Chancellor, confused the message by taking a rather different line. "The data shows growth being sustained very strongly in the fourth quarter of last year. Manufacturing remains very buoyant in this economy," he said, speaking after a conference on trade to the Far East.

The picture was further confused by the apparent inconsistency of yesterday's data with recent survey evidence from the CBI showing continuing strong optimism on production.

Yesterday's completion of data for 1994 confirmed that production grew at its fastest pace since 1989.

Manufacturing output rose by 0.5 per cent in December from a month earlier, mainly driven by increased output in the food, drink and tobacco, basic metals and engineering industries. It was up 5.3 per cent from a year earlier.

Industrial production, which is usually more erratic because of the inclusion of energy, increased by a stronger 0.8 per cent from November, and was up 5.3 per cent year-on-year.

The more reliable three month comparison indicated the slowdown, with manufacturing output rising by 0.7 per cent in the final quarter of last year, compared with growth rates of well over 1 per cent earlier in 1994.

Already heartened by the fall in commodity prices on Monday, the market yesterday warmed in early gains to the view that the output data show inflationary pressures are cooling. The FTSE 100 closed up 10.7 at 3072.7

Yesterday's output data lend credence to the argument that economic growth has passed its peak, a point strongly taken up by the Treasury. "The figures confirm strong manufacturing growth in 1994, with a slowdown to a more sustainable rate in the fourth quarter," it declared.

"The Treasury is leaping on these figures to say perhaps we do not need to do much more on interest rates, but the Bank of England will be sceptical about running policy on the back of this better set of industrial figures," said Mark Reckless of S. G Warburg.

Eddie George, Bank of England Governor, has made a point recently of stressing the view that the economy is slowing down, and that the latest interest rate rise was designed to head off inflationary pressures, particular from producer prices, wages and retail sales, seen to be building up in the pipeline.

But in trying to judge future monetary policy implications, analysts are finding their task complicated by the seemingly inconsistent picture of the economy presented by the latest output data and material from the CBI industrial trends survey, which rose from plus 17 in October last year to plus 33 in December.

"If the economy is slowing down, why are people responding to the CBI survey saying they are piling more and more into production," Mr Reckless said.