Treasury takes heart as factory output creeps up

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The Treasury yesterday took heart from a slight rise in manufacturing output that appeared to cast doubt on fears of a slide into deeper recession.

But the better than expected increase of 0.2 per cent in June came as unemployment rose by 29,100 last month, driving the seasonally adjusted total above 2.75 million for the first time in five years.

Manufacturing output has risen gently for two successive quarters, for the first time since it slipped into recession in the second quarter of 1990. On the basis of the latest figures, the Central Statistical Office said factory output now appeared to be growing at an annual rate of 1 per cent. 'It does seem to suggest that all the gloom and doom has been overdone,' a Treasury official said. 'Things are slowly getting better.'

Although the rise in unemployment was slightly higher than expected and the jobless count was up in every region, the average increase of 19,400 in the latest three months was the lowest for almost two years. Gillian Shephard, the Secretary of State for Employment, denied the higher jobless total amounted to a crisis. 'This month's figure, regrettable as it is, is not unexpected. But the trend in the increase is still downward.'

In a further sign of ebbing inflationary pressures, average earnings grew more slowly over the year to June than at any time for 25 years. The rate dropped by a quarter of a point to 6 per cent, compared with a rise in prices of 3.9 per cent over the same period.

A further modest fillip for the economy came when the Halifax Building Society, the country's largest, cut its savings rates, signalling that for the moment at least mortgage rates are no longer under threat from a general rise.

But the economic news failed to cheer the City and in London the pound fell to a 27-month low of DM2.8187, a loss of half a pfennig. Later in New York, sterling sank further to DM2.8120, barely 3 pfennigs off its floor in the European exchange rate mechanism.

In a call for Tory unity ahead of the autumn conference season, Sir Norman Fowler, the party chairman, said the party had never promised an 'armchair ride' to recovery. He said in a letter to party workers that the Tories had been elected to squeeze inflation out, keep public spending under control and keep taxes low.