View from City Road: At last it really looks like recovery

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The Independent Online
The sharp rise in manufacturing output in February shows that the economy is at long last recovering. Yesterday's figures were far better than the markets were expecting and could well be followed by a rash of more optimistic growth forecasts.

Manufacturing output wobbled around in a narrow band between 111 and 112 (1985=100) from last February through to the beginning of this year, when suddenly it began to move. Yesterday's figures did not merely show a sharp rise in February, but they also revised up the previous rise shown for January.

The total increase since December is now 2.5 per cent. This performance is likely to mean that the onshore economy will register reasonable growth in the first quarter, only its second rise since 1990.

The figures confirm much other recent evidence that the Chancellor's green shoots are finally sprouting. As the Treasury's monthly monetary report points out, the narrow measure of money supply, M0, moved even further above its 4 per cent ceiling, rising by 1.1 per cent in March alone. House prices rose by 1 per cent in the month, and a recovery in this key asset market may now be beginning.

The unexpected fall in unemployment in February was probably a freak, but the fear of becoming jobless is likely to recede. Both the CBI's and other surveys have pointed to resurgent confidence.

There are, though, uncertainties, not least because of the temporary lack of trade figures. The sizeable excess of imports over exports means that the economy can only grow sustainably if we export more and capture more of our home market.

In theory, the rise in manufacturing is good news because it is such an internationally competitive and tradeable sector. Some of the detail in the figures was encouraging, notably the sharp rise in computer and other electrical products for export. The output of investment goods rose by 2.6 per cent taking the latest three months on the previous three.

But it is also possible that some of the rise in overall output has been due to the unexpected strength of recent retail sales volumes, which is not such good news for the trade balance. The high-street revival may have caused a rundown in retail stocks - shops then have to place more orders not merely to meet increased demand but also depleted stocks. That sudden burst of orders can lead to a sharp bounce in output, which may then flatten out.