Factory output surge calms fears over UK's recovery: Figures boost pound and make another cut in interest rates unlikely

THE SHARPEST surge in factory output for more than four years yesterday calmed fears that Britain's economic recovery was running out of steam. It boosted the pound and made another interest rate cut less likely.

The 1.8 per cent jump in factory output in May was the biggest since April 1989, far exceeding City forecasts of a 0.2 per cent increase. Manufacturers have stepped up production by nearly 5 per cent since the beginning of the year, making up almost half the ground lost in the recession. Factory output is now at its highest for more than two and a half years.

John Major told the House of Commons that the increase was 'very good news indeed'. He said it suggested British manufacturers were becoming more competitive and making substantial inroads into overseas

markets.

But the Central Statistical Office warned that the figures may well have been flattered by statistical overcompensation for bank holidays during the month. City economists took the CSO warning to heart, but said manufacturing industry still appeared to be recovering strongly. Kevin Gardiner, of Warburg Securities, said the faulty seasonal adjustment could explain half the monthly increase.

The Treasury hailed the figures as 'further evidence of steady recovery'. Officials have privately told the Chancellor that the Budget forecast of 1.25 per cent growth in the economy this year is too pessimistic, and that it will be nearer 1.75 per cent.

Keith Skeoch, of James Capel, said the figures showed that 'a robust recovery is under way' and that economic gloom in Europe did not appear to be taking too much of a toll on exports. He added that the economy was unlikely to grow by less than 1.5 per cent in 1993 unless there was a fresh downturn later in the year.

Almost all sectors stepped up production in the past three months, with rapid growth in metals, cars, computers and wool. Economists welcomed the growth being concentrated in investment, rather than consumer, goods. This suggests industry is gearing up for a strong, sustained recovery.

Industrial production - which includes energy and water industries as well as manufacturing - rose 2 per cent in May, accounting for about a third of the economy's total output. Coal production continued to slide.

The rise in factory output boosted the pound on the foreign exchanges - it rose 1.7 cents to dollars 1.4935 and over a pfennig to DM2.5678, the highest close against the mark since the aftermath of sterling's ignominious departure from the European exchange rate mechanism last September.

The money markets reflected hopes of an early interest rate cut receding, with less need now seen to boost the economy. But dealers still expect base rates to be cut below the current 6 per cent by the year's end, either to boost the Government's political fortunes or as a quid pro quo for tax increases in November's Budget.

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