Buoyant sterling erodes industry growth

The strong pound is chipping chip away at growth in manufacturing, official figures suggested yesterday.

Manufacturing output fell unexpectedly in March, declining in all sectors except engineering.

Separate figures for car sales last month, showing the consumer spending spree continuing unabated, highlighted the contrast between the strength of home demand and weakness on the export front.

The division in the economy has split economists between those who call for further interest rate rises to slow consumer spending, and those who reckon this would harm the recovery in industry.

Marian Bell at Royal Bank of Scotland said: "Obviously manufacturing is not growing very strongly but that should not prevent the Bank of England from putting interest rates up again."

In the other camp, Jonathan Loynes at HSBC Markets said: "Industry needs more rises like it needs a hole in the head."

The financial markets brushed off all such worries. Share prices climbed again, the FTSE 100 index ending up more than 18 points at 4,537.5, another record. It has gained nearly 100 points in the three trading days since Labour's victory last week.

The pound held steady at just over DM2.81. Gilt prices fell slightly but the yield premium over German bunds also narrowed a little further. Tuesday's fall in this spread had been the biggest in a single day for nearly three years.

Manufacturing output fell by 0.1 per cent in March. It rose 0.6 per cent in the first quarter of the year, to a level 1.6 per cent higher than a year earlier.

"Manufacturing is not yet up against the wall. This is growth of about the trend rate," said Michael Dicks, UK economist at Lehman Brothers.

In the latest month, output was down in most of the main sectors, with drops of 0.8 per cent in chemicals and metals. Engineering bucked the trend with a 0.3 per cent increase.

David Hillier at BZW said it made sense for engineering exports to have suffered less because the industry's products were typically more sophisticated and therefore less sensitive to price competition.

Taking the first quarter compared to a year earlier as a better indication of the trends, engineering production is up 4 per cent, metals 2.7 per cent, textiles and clothing 1.8 per cent; but the other sectors showed smaller gains.

Total industrial production was also down 0.1 per cent during March. Apart from the drop in manufacturing, its main component, gas, electricity and water supply, was down 0.6 per cent due to the unseasonably warm and dry weather. Industrial output climbed 1.4 per cent in the year to the first quarter.

Separately, the Society of Motor Manufacturers and Traders said new car sales had risen 12.3 per cent in the year to April. Retail custom had improved.