Official figures confirm recession in manufacturing

MANUFACTURING output fell for the second successive quarter in January to March, according to official figures yesterday. The decline, although small, put it technically into recession, confirming fears about the damage being done to industry by the strength of the pound.

A separate survey of retail sales last month suggested consumer spending might be slowing. Alongside figures showing that inflation at the factory gate is non-existent, yesterday's batch of evidence was cheering news for those hoping for no further rise in interest rates.

More light on the interest rate debate will be shed by the publication tomorrow of the Bank of England's quarterly Inflation Report and of the latest figures on earnings and unemployment. The danger of overheating in the jobs market poses the biggest remaining risk on the inflation front.

Manufacturing output was flat in March, and fell 0.1 per cent in the first quarter of the year. Total industrial production, of which manufacturing is the biggest component, fell 0.3 per cent after a drop of nearly 0.9 per cent in the final quarter of last year.

A bounce in oil and gas extraction and the output of the electricity, gas and water industries in March took total production unexpectedly higher during the month. But the underlying annual growth rate in both manufacturing and industry as a whole was little above zero.

Only the engineering industry has withstood recession. Its output climbed 1.9 per cent in the first quarter to a level 3.6 per cent higher than a year ago. In contrast, textiles production fell 2.2 per cent to stand 6.8 per cent below its level a year earlier.

Separate figures showed a further fall in the cost of manufacturers' raw materials in April. They were down 0.9 per cent during the month and 9.0 per cent year-on-year.

The fact that input costs have been falling for more then two years - thanks in large part to the rising pound - has allowed industry to offset rising labour costs and keep prices charged at the factory gate little changed. Output prices rose 0.1 per cent in April, and 1 per cent year- on-year. But much of that rise was due to the increase in excise duties announced in March's Budget.

One question mark hanging over the outlook for the Government's target measure of inflation, the retail price index less mortgage interest costs, is what will happen to prices at the factory gate if the pound falls even further. It has shed 20 pfennigs since hitting its peak of DM3.10 last month.

Another concerns the pace of consumer spending, which has so far kept retail price inflation stubbornly above its target. The latest survey by the British Retail Consortium showed a bounce in sales in April following a very subdued March.

However, the BRC said taking the two months together suggested a slowdown in the growth of high street spending had begun. The value of sales on a like-for-like basis rose 5.7 per cent in the year to April, up from just 0.4 per cent the previous month. But adjusting for the late Easter this year by taking the two months together suggested sales growth had slowed.