Slump in industry was behind Bank's decision on rates

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The Independent Online
Official figures indicating that British industry is on the verge of recession explained the Bank of England's decision not to raise interest rates earlier this week. The latest US evidence, meanwhile, showed it is still enjoying bumper growth. Diane Coyle, Economics Editor, reports.

December saw a 0.2 per cent drop in industrial output, the fifth month running it had declined, confounding economists who had expected a rebound in production following the recent publication of more upbeat business surveys.

Manufacturing output, the biggest component of the total, fell by 0.5 per cent, its third monthly decline running.

The figures mean industrial production has now suffered its weakest stretch since 1991. Another monthly drop would put industry technically into recession, the definition of which is two successive quarters of declining output.

The weakness went across the board in manufacturing, with monthly gains in only food, drink and tobacco and petrol refining. Outside manufacturing, both electricity, gas and water supply and oil and gas production rebounded after a very weak November.

A combination of falling exports as a result of the strong pound and slower growth in demand in home markets lies behind the depressing performance. Some City analysts expressed doubt about the reliability of the figures, but most saw them as a vindication of the Monetary Policy Committee's decision to leave the cost of borrowing unchanged.

Michael Saunders at Salomon Smith Barney said interest rates had now reached their peak. "Collapsing exports will produce very weak growth in the first half of 1998," he said.

Although this was the widespread view, some dissenters said the official figures were implausibly weak.

There was some support for the minority opinion that there are still inflationary dangers in a report that pay deals are running further ahead of inflation this month. Incomes Data Services said almost half of the 40 deals they had monitored were for 4 per cent or more, and two - covering IT staff at Barclays and House of Fraser employees - were in double figures.

Still, figures from across the Atlantic yesterday, greeted with delight by President Clinton, left little doubt that the British economy is far weaker than the US.

The American economy created 358,000 non-farm jobs last month, and in the latest three months has been generating jobs at an annual rate of 4.5 million. The proportion of the US workforce currently in work is, at 64.2 per cent, the highest ever.

The figures also showed a jump in the average working week from 34.6 to 34.8 hours.