Government claims vindication from growth in manufacturing

Sharp rises in manufacturing output and overall productivity combined to offset stagnation in the services sector, new figures showed yesterday.

The figures were greeted in the City as a fresh pointer towards a hike in interest rates, while the Treasury hailed them as support for its optimistic economic forecasts.

Factories in the UK posted their strongest month in two years in June while recent revisions to growth showed worker efficiency in a better light.

Ed Balls, the Economic Secretary to the Treasury and Gordon Brown's right-hand man, hailed the figures as evidence of "unprecedented" growth and stability.

Mr Balls, who is tipped as the next Chancellor, said: "Just as GDP growth has been stronger than first thought, so too has productivity growth."

The Chartered Institute of Purchasing and Supply (Cips) said factory output grew at the quickest rate since July 2004 as demand at home and abroad strengthened. Its index of activity rose to 55.1 per cent in June on a scale where a number over 50 denotes expansion.

Firms took on more staff for only the second time in 15 months. "The recovery of manufacturing was unremitting this month amidst reports of robust growth," said Roy Ayliffe, a director at Cips.

Meanwhile the Office for National Statistics said the output of the average British worker rose 1.5 per cent in the year to March, up from 1.2 per cent in the final quarter of last year and the best since the third quarter of 2004.

The improvement was driven by last week's upward revisions to growth over the past few years, which combined with an unchanged number of hours' work to raise the output per worker. Howard Archer, the chief UK economist at Global Insight, said: "This will be particularly well received by Gordon Brown, given the importance he has placed on improving the UK's performance."

Separate figures from the ONS showed growth of the services sector, which makes up two-thirds of the economy, was stagnant in April. This took the quarterly growth to 0.5 per cent, the third successive month it has slowed. It is now at the weakest level since May 2005.

The slowdown was driven by a monthly drop of 1.6 per cent in the hotels and restaurants sector and by a 1.0 per cent fall in distribution, particularly of cars and fuel.

This was offset by further rises in business services such as consultants, lawyers and accountants. "It is noticeable that business-to-business remains quite strong but consumer-facing industries are much weaker," an ONS statistician said.