Manufacturing growth surge sparks hope for economy

MANUFACTURING activity grew last month at its fastest pace in 15 years, offering further hope the economy can avoid slipping back into recession.

Analysts said the news made it a near certainty the Bank of England would bring its 200 billion money printing programme to a temporary halt this week.

As well as a sharp rise in output, yesterday's manufacturing snapshot from the Chartered Institute of Purchasing & Supply (Cips) and Markit showed new orders expanding at their fastest pace in six years while employment grew for the first time in nearly two years.

British manufacturers, who account for about two-fifths of the economy, have been battered by the global downturn – shedding thousands of jobs while attempting to pass on higher input costs such as raw materials and fuel. However, the weak pound has helped offset some of the pain.

New export orders last month hit their highest level since Cips began collecting export data in 1996. The survey's main activity index jumped to 56.7 in January from an upwardly-revised 54.6 a month earlier, giving the highest reading since October 1994.

As well as being ahead of analysts' forecasts, the latest figure is well clear of the 50 mark that separates expansion from contraction. Economists said the upward revision to the December index boosted hopes fourth-quarter GDP growth could be revised up.

Official data last month showed the UK economy grew by a slender 0.1 per cent in the closing months of 2009, ending the deepest period of contraction since the Second World War.

Fears remain, though, that rising unemployment and higher inflation could trigger a so-called "double dip" recession.

Howard Archer, chief UK economist at forecasting group IHS Global Insight, said most aspects of the Cips' survey made for "very pleasant reading".

"It does suggest that manufacturers could be starting to increasingly benefit from leaner stock levels, improved competitiveness in both domestic and foreign markets stemming from the weak pound, and firmer demand in key overseas markets," he noted.

Market reaction to the manufacturing figures was muted as they merely reinforced the widely-held view that the central bank will announce a pause in its quantitative easing programme later this week.

Lena Komileva, G7 market economist at Tullet Prebon, said: "With the BoE widely expected to stop asset purchases this week, consumers face considerable uncertainty given the prospect of a higher cost of living, higher mortgage rates, and higher taxes, which puts the sustainability of the recovery at risk."

Andrew Goodwin, senior economic advisor to the Ernst & Young Item Club, said:

"We expect the pound to remain weak for some time, providing significant support to competitiveness and, with increasing evidence that the global rebound is gaining momentum, we continue to look for exports to lead the UK economy through the recovery phase."