Fresh signs appear of uneven recovery: Report shows sharp October manufacturing boost

A REPORT showing a sharp rise in factory output and orders in October appears at odds with the latest Confederation of British Industry survey and suggests that the manufacturing recovery may have resumed.

At the same time signs of a patchy recovery in Continental Europe are provided today by NCM Credit Insurance, the privately run successor to the Export Credits Guarantee Department's short-term division.

The October survey of purchasing managers in UK manufacturing industry, published this morning by the Chartered Institute of Purchasing and Supply, shows that output and orders were lifted by stronger domestic demand, especially for consumer goods. But employment contracted after two successive monthly increases.

The contrast with the latest quarterly CBI poll, which pointed to stagnant orders and stalling business confidence, may partly reflect a change of sentiment during October. The institute's survey extended throughout most of October, whereas the CBI's polling was completed by the middle of the month.

The report supports evidence of an uneven rather than a fragile manufacturing recovery and may dampen pressure for a large cut in base rates around the time of the Budget on 30 November.

Alongside predictions that figures tomorrow will show a further acceleration in narrow money supply growth in October, the purchasing survey may provide ammunition to those Treasury officials arguing for large tax rises because of a conviction that the recovery is taking root.

NCM's quarterly export study shows that the number of Continental European companies defaulting on their payments to British suppliers is finally starting to fall. Defaults in the year to September are down sharply on those in the year to June.

The improvement was most marked in France and Italy, while Germany showed the least . Payment delays are still increasing but at a much slower rate.

Conni Randall, NCM's business strategy director, said: ' Our findings suggest that in some parts of Continental Europe the recession may have bottomed out. In the short run the outlook for UK exports to Europe remains bleak with recovery still some way off from being established.'

The purchasing managers' index rose to 53.6 per cent in October, the ninth consecutive month in which an expansion of manufacturing activity has been signalled. But the increase, from 51.7 per cent in the previous month, also suggests that activity expanded at an accelerating rate, the institute said.

'The survey shows a sharp rise in manufacturing output, new orders and purchases,' the institute said. 'It shows clearly that fresh vigour continues to return to UK manufacturing, as demonstrated by the marked upturn seen in output and order books.'

The institute said improved domestic demand was cited as the main source of growth in new orders in October. But after two months of falling exports and export orders, a slight rise in overseas orders was also evident.

However, it suggested that the rise in production may reflect the first indication of Christmas demand. The stocks of finished goods index was little changed, showing that continued destocking was offset by Christmas stockbuilding.

The output index rose to 57.9 per cent, its highest level since June, while the new orders index climbed to its highest level since April.

The public sector had a net debt of pounds 201.7bn at the end of March, up 22.3 per cent on a year earlier, the largest increase since the series began in 1970. Net debt as a share of gross domestic product rose by 5 percentage points to 32.9 per cent, according to an article released early from tomorrow's Bank of England Quarterly Bulletin.