Stagflation fears stalk UK industry

The strong rebound in growth at Britain's factories hit a bump last month as output and new orders both slowed, a snapshot survey showed yesterday.

The headline activity index produced by the Chartered Institute of Purchasing and Supply (Cips) fell in May from April's 117-month high. It eased to 53.2 from 54.0 on a scale where 50 separates expansion from contraction, only its second fall this year.

It contrasted with the eurozone economies, where growth in its manufacturing sector rose to its strongest in almost six years.

Cips said the slight slowdown masked the fact that UK manufacturers had posted their 12th successive month of growth.

Roy Ayliffe, a director of Cips, said: "The unrelenting recovery being experienced by the sector is bolstering manufacturers' outlook about the future with levels of confidence hitting another high."

Despite the slowdown in activity, analysts said a surge in input and output prices would keep the Bank of England's interest rate committee on alert.

Rising energy and raw materials costs sent the index of raw materials costs to 67.4. Prices at the factory gate also rose, with that index rising for the 10th straight month in May to 53.7 from 52.0.

Factories were supported by strong growth in the eurozone, which underpinned an acceleration in volumes of fresh export orders, especially from Germany. Demand from the US and Japan also improved.

George Buckley, chief UK economist at Deutsche Bank, said: "This is generally a slightly weaker survey but ... it is not all negative news. Strong foreign demand seems to be finally helping UK manufacturers."

Analysis by Citigroup showed the UK was now lagging behind the main five euro countries - France, Germany, Holland, Italy and Spain - for the first time in several years.