Industry turns the corner: Surge in output surprises City - 'This is not another false dawn'

ECONOMIC recovery appears to be under way with official figures yesterday unexpectedly showing the sharpest surge in manufacturing output for five and a half years.

Industry has stepped up production significantly since Christmas after a year of stagnation. The Central Statistical Office said that output rose by 1.2 per cent in February. That followed an increase of 1.3 per cent in January, first thought to be only 0.8 per cent.

Norman Lamont, the Chancellor, said: 'The prospects for manufacturing over the coming months are very bright indeed.' But he was wary of claiming that recovery was irrevocably under way.

But Treasury officials believe figures for production throughout the economy, due this month, will confirm that recovery began early this year after two and a half years of falling or stagnant output, the longest recession since the Second World War.

The Treasury said in its monthly monetary report that indicators since the new year 'point to some improvement in UK demand and activity'.

The CBI said confidence among banks and other financial institutions had shown its sharpest quarterly improvement since its financial services survey began in 1989, with income rising and business volume expected to recover during the spring.

The CBI survey came a day after Dun & Bradstreet declared the recovery 'well and truly under way' on the basis of a dramatic rise in companies' forecasts of sales. Recovery hopes have also been boosted by signs of revival in the housing market, rising high street spending and February's surprise fall in unemployment.

The revival in manufacturing was broadly spread. Production of computers has been particularly buoyant, with exports boosted by the fall in the pound since Britain left the European exchange rate mechanism. Production of chemicals, engineering goods, clothing, paper, drink and tobacco were all significantly higher in the three months to February than in the previous three months. Only car production showed a sharp fall.

Manufacturing output in February was the highest for two years, although nearly 6 per cent below its pre-recession peak. The CSO said output was rising at a trend rate of about 3 per cent a year, compared with 0.5 per cent estimated last month. But statisticians warned that output had grown at similar rates towards the end of the last two recessions, only for industry to suffer another downturn soon afterwards.

Energy output fell 2.1 per cent in the three months to February, with North Sea oil extraction disrupted by storms. Industrial production, comprising manufacturing and energy, was 0.3 per cent higher.

The figures surprised the City, where most economists had expected manufacturers to cut production in February. Keith Skeoch, of James Capel, said recovery appeared to have achieved a self-sustaining momentum. 'This does not look like another false dawn.'

Economists said the manufacturing upturn reflected the falls in interest rates and the pound since Black Wednesday, and measures to boost industry in the Autumn Statement. Kevin Gardiner, of Warburg Securities, said national output was likely to have risen by about 0.5 per cent between the last quarter of 1992 and the first quarter this year.

The figures boosted the pound, which closed at a 12-week high against a basket of other currencies; it has risen by nearly 5 per cent in the past month on growing economic optimism. The Bank of England has exploited its strength to buy foreign currency covertly, replacing reserves spent on the ill-fated attempt to keep sterling in the ERM.

The pound rose by 0.68 pfennigs against the German mark, to DM2.47. The mark has been weakened by gathering evidence that Germany is heading for a slump.

Some economists expect Mr Lamont to use sterling's strength to cut interest rates again, especially if the recovery falters.

Roger Bootle, of Midland Bank, said a further cut was likely as the Government would not want too strong a pound while the recovery was weak and the balance of payments in substantial deficit.

Figures published yesterday by Corporate Estate Agents, which represents about half the market, showed a 36 per cent increase in house sales last month.

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