Output trend slips to lowest for three years

DIANE COYLE

Economics Editor

The trend in industrial output in February was at its weakest since the exchange rate crisis in September 1992, government statisticians reported yesterday.

The likelihood that manufacturing industry is firmly in recession fuelled City expectations that Chancellor Kenneth Clarke will cut the cost of borrowing one more time - despite a call for caution on interest rates from the Treasury's independent advisers and further evidence of high street recovery.

"Sitting on his hands might be the best approach at the moment, but Mr Clarke is going to cut base rates," predicted Simon Briscoe, an economist at investment bank Nikko Europe.

Meanwhile, the retail sales recovery continued for the sixth successive month in March, according to the latest survey from the Confederation of British Industry. This steady growth in sales is likely to be reflected in later official figures.

Although the increase in sales volumes was slightly lower than the previous month's, there was a big jump in the volume of orders placed with suppliers to the highest level for more than two years. Retailers expect a strong advance in April sales even though their high expectations for last month were disappointed.

Manufacturing output was virtually flat in February. Its level in the latest three months was 0.5 per cent lower than the previous three months.

Total industrial output was up 0.1 per cent during the same period. A rebound in energy production due to colder weather took it 0.4 per cent higher during the month.

The Office for National Statistics (replacing the CSO) said the trend in both manufacturing and total output was flat. Manufacturing has now been static for three months, while the trend in industrial output dropped from 0.5 per cent growth to zero for the first time since September 1992.

Analysts played down the significance of the weak figures, while admitting that they gave Mr Clarke an excuse to cut base rates if he wanted to. An expected cut in German interest rates would also help.

Kevin Darlington at brokers Hoare Govett said: "The economy is poised between two conflicting forces. Manufacturing is sluggish but the firmness of underlying demand is showing through." Last year's excess stock levels were being run down, he said.

Sean Shepley at investment bank CSFB said: "These figures tell us that demand was weak last year. It would be a mistake to set policy on the basis of a lagging indicator."

Barring an unexpectedly big jump in output in March, manufacturing output is likely to have fallen for two successive quarters. This would put it technically in recession, and could point to further job cuts in industry after a decline of 27,000 in January.

It would also mean a weak figure for GDP growth in the first quarter of this year, as manufacturing accounts for about a quarter of the economy. The Chancellor and Governor of the Bank of England have tended to focus on the quarterly change in GDP in their policy discussions. By the time they next meet on 8 May, the two men will have the preliminary estimate of first-quarter growth, which could show a smaller rise than the fourth quarter's 0.5 per cent.

The meeting will also come shortly before the publication of the Bank's next quarterly Inflation Report. This is expected to say, as the latest one does, that the Government is more likely than not to meet its inflation target.

Sudhir Junankar, a CBI economist, said of the retail sales survey: "The continued expansion in the retail trade is encouraging as it suggests that consumers are becoming more confident and willing to spend more freely."

The balance of retailers reporting higher sales compared to those reporting a decline in the year to March was 27 per cent, compared with 30 per cent in February.