Surge in factory output eases fears over tax rises

An unexpectedly sharp rise in factory output in February yesterday made another cut in interest rates less likely by easing fears that this week's tax increases will cripple economic recovery.

But economists at the International Monetary Fund in Washington were reported to have become more pessimistic about Britain's economic prospects this year than they were in September.

A draft of their new World Economic Outlook showed a forecast of 2.5 per cent growth for Britain this year, compared with the 2.8 per cent predicted in September. Germany's growth forecast has been cut from 1.2 to 0.8 per cent, but the US is expected to grow by 3.8 rather than 2.6 per cent.

British manufacturers stepped up production 0.6 per cent in February, taking factory output to its highest monthly level since June 1990, according to the Central Statistical Office. But the CSO cut slightly its estimates of output in the previous five months.

February's jump was bigger than most City economists had expected. The markets were little moved, however, with the FT-SE 100 index closing 2.5 points lower at 3,129.

The sterling futures market continued to point to a quarter-point rise in base rates to 5.5 per cent by the summer, although most economists believe the next move is more likely to be down than up.

The Treasury said the industrial production figures showed the economy was recovering on a broad front. But the City is still uncertain how consumers will react to tax increases, which have already dealt consumer confidence a blow.

Factory output in the first two months of the year was well above the levels seen late last year, rising 0.8 per cent between the three months to November and the three months to February. The CSO said factory output was rising at a trend rate of 3 per cent a year, up from 2 per cent last month.

Output of investment goods is rising three times as quickly as the output of consumer goods, having lagged behind earlier in the recovery. Output in engineering rose 1.6 per cent in the three months to February, led by a 2.8 per cent rise in electrical and optical equipment.

Industrial production - which includes electricity, gas, water, mining, quarrying and the oil industry, as well as manufacturing - rose 0.8 per cent in the month. Cold weather caused a rebound in the energy sectors.

The figures were in line with recent surveys of manufacturers by the Confederation of British Industry, which suggest that output should continue to grow strongly in coming months.

'Given problems with the trade figures that feed into the output estimates, it is possible that official estimates are still understating the recovery in manufacturing output,' said John Marsland, economist at UBS.

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