Rise in retail sales and manufacturing output boost economy

Hopes of an economic surge in the wake of the end of the Iraq war rose yesterday as retail sales and manufacturing output rebounded last month while consumers continued to rack up debt.

The upbeat tone of yesterday's figures will add to the head-scratching at the Bank of England ahead of a tough decision on interest rates next week.

The positive tone of the UK reports contrasted with news out of the US, where share prices tumbled as output shrank and dole queues lengthened.

Shoppers flocked back to Britain's high street in April, according to the Confederation of British Industry. One in 10 retailers on balance said sales volumes were up on April last year, an improvement from March when it said sales fell at the fastest pace for a decade.

However the CBI repeated its call for a rate cut, saying once monthly swings were stripped out retail sales had "halted".

Alastair Eperon, at the CBI, said: "This is further evidence that the stimulus of a rate cut is needed in parts of the economy beyond just manufacturing."

But some analysts said the figures had reduced the need for a rate cut, especially as the more upbeat tone was echoed by the other data yesterday.

Manufacturing activity also rose sharply in April, rebounding from a 15-month low in the previous month. Output fell for the third month in a row, according to the survey of managers by the Chartered Institute of Purchasing and Supply (Cips). But Cips said the cuts were much less significant than in March, which anecdotal evidence blamed on uncertainty over the war in Iraq.

Roy Ayliffe, a Cips director, said: "The manufacturing industry managed to pull itself back in April, despite the effect of the war on economic stability."

Consumers borrowed £1.9bn in March, the Bank of England said, the largest rise since the record £2.04bn last September.

Credit card borrowing surged £759m, the highest increase since August, which supported official estimates of a jump in retail sales in March.

But mortgage approvals – loans agreed but not yet made – fell to 98,000 from 100,000, the lowest level since April 2001, adding to anecdotal evidence that Britain's booming housing market might be cooling.

In contrast to the UK, US factories recorded their worst fall in output since the aftermath of 11 September. The number of new claims for unemployment benefit rose to their highest for a year while spending on new construction fell in March.