Manufacturing receives boost from consumers

The benefits of the consumer recovery are finally starting to trickle down to industry. Manufacturing activity increased last month for the first time since December, with output returning to its highest level for more than a year, according to the monthly survey of purchasing managers.

The first signs of a pick-up in manufacturing coincided with further evidence of slow improvement in the housing market. Both the Halifax and Nationwide building societies reported growth of 4 per cent in house prices over the past year, the highest annual rise since 1991.

Other figures showed the biggest monthly jump in cash in circulation for more than six years in June and continuing rapid growth in consumer credit.Angela Knight, Economic Secretary to the Treasury, said: "Economic life continues to improve."

Yesterday's batch of figures gave a boost to government hopes that the economy will be in peak shape in time for a spring election.

City opinion was divided over whether the Chancellor, Kenneth Clarke, would slip in another cut in base rates this month, before the evidence of economic recovery gets much stronger.

"I find it difficult to believe he would risk another rate cut now," said David Owen, an economist at investment bank Kleinwort Benson. However, Ciaran Barr at Deutsche Morgan Grenfell said: "He might see an advantage to moving this month. It will be more difficult by September because the economy is recovering."

Mr Clarke will hold his monthly meeting with Eddie George, Governor of the Bank of England, tomorrow, followed by a pre-holiday meeting at the end of July. And the Treasury will next week publish its new forecast for the economy. It will downgrade this year's growth outlook from the over-optimistic 3 per cent it pencilled in at Budget time.

The purchasing managers' index of activity climbed last month to 50.9, above the watershed between recession and recovery, from 47.6 in May. Output rose sharply, orders were higher, stocks of finished goods fell and cutbacks in employment were less pronounced than earlier in the year, the Chartered Institute of Purchasing and Supply reported.

Makers of consumer goods enjoyed the biggest gains in output and new orders, according to the report. The intermediate goods sector expanded too, but output and orders for investment goods declined.

Peter Thomson, director general, was cautious about the improvement. "A manufacturing sector which is only just expanding is no cause for celebration," he said.

The CIPS warned that export order books remained weak, and price discounting was widespread. The prices index fell to its lowest since the survey began five years ago.

The upward surge in house prices appeared to reach a temporary plateau last month, according to Halifax Building Society. Its figures showed that property prices dipped for the first time in almost a year.

But its report of a 0.3 per cent fall in June conflicted with a separate survey from Nationwide indicating that prices rose by 0.5 per cent last month.

Separate Bank of England statistics showed that annual growth in mortgage lending edged up to 4 per cent in the year to May. The number of mortgages approved rose to 87,000, the highest for nearly two years.

Philip Williamson, corporate development director at Nationwide, said: "This month's rise in prices adds to the compelling range of evidence suggesting that a sustained recovery in the housing market is under way."

Halifax predicts house prices will rise by around 5 per cent in 1996 - more cautious than City investment banks which reckon the rise could be 6-8 per cent.

The Bank of England reported that the monthly rise in cash in circulation in June was the biggest for more than six years, partly due to free-spending foreign football fans visiting Britain for the Euro 96 competition.

Growth in M0, the narrow money measure, jumped by 1.3 per cent, taking its year-on-year growth to 7.3 per cent.

The influx of tourists for the football and the brief spell of sunshine provided part of the explanation. "The better weather brought out the shopper in us," said Kevin Darlington, at brokers Hoare Govett.