Fall in output erases two months of gains

BRITAIN'S manufacturers cut production by 0.5 per cent in December, unexpectedly wiping out the increases in factory output in the previous two months, the Central Statistical Office said yesterday.

Gordon Brown, the shadow chancellor, seized on the figures as further evidence that the tax increases looming from April onwards are already slowing the economy. But the Treasury emphasised that the underlying trend showed factory output continuing to rise.

The figures were seen by some City analysts as ex post justification for last week's base rate cut, but a report from the Confederation of British Industry today suggests that pay settlements in manufacturing are picking up - perhaps the first stirrings of inflationary pressure from the labour market. The figures mirror signs of a pick-up in the latest Incomes Data Services survey.

The CBI found manufacturing pay settlements averaging 2.6 per cent in the three months to January, up from 2.2 per cent in the three months to December. But service sector settlements edged down to 2.6 per cent in the three months to January from 2.7 per cent.

Factory output in the fourth quarter was 0.5 per cent up on the previous quarter, with the CSO estimating a trend increase of 1 per cent a year, down from an estimate of 1.5 per cent a month ago.

Engineering was the only sector showing a fall in output in the fourth quarter, with mechanical and electrical equipment industries retrenching.

Factory output is still nearly 5 per cent below its peak before the recession, although John Marsland, at UBS, said output could be understated because of problems measuring exports within the European Union. CBI surveys point to strong output growth in coming months.

Industrial production - which includes oil, gas, electricity and water production as well as manufacturing - rose by 1.3 per cent in the fourth quarter over the third. The CSO estimates that it is rising at a trend rate of 2.5 per cent a year. North Sea production has now matched its peak in the mid-1980s.

In contrast, US industrial output expanded by 0.5 per cent in January despite the Los Angeles earthquake and freezing weather that put many plants out of action.

The expansion followed an upwards revised gain of 0.9 per cent in December and, together with other strong economic statistics, may suggest that quarterly growth could be revised upwards to an annual rate of between 6 and 6.25 per cent from a provisional 5.9 per cent.

Industry's capacity utilisation rate edged up to 83.1 per cent - the highest for four and a half years and close to the level the US Federal Reserve usually regards as signalling a pick-up in inflation pressures.