LONDON, April 7 - Manufacturing output in Britain staged a surprise rise in February for a second month in a row, suggesting the sector may be down but is not yet out in spite of the hit to business sentiment from the Iraq war. The Office for National Statistics said manufacturing output, which accounts for a fifth of the economy, rose 0.3 percent in February from January. The rise totally confounded market expectations of a fall of 0.3 percent. But, unlike January when the strength was centred around computer output only, February's recovery was more broad-based with most manufacturing sectors showing a rise. The data will provide welcome relief for Chancellor of Exchequer Gordon Brown ahead of Wednesday's annual budget and the Bank of England's Monetary Policy Committee which will meet on interest rates later this week following recent flows of gloomy economic numbers.
Financial markets reacted swiftly with government bonds and interest rate futures falling further on the perception that further interest rate cuts from the Bank of England may not be necessary. The pound nudged higher to 68.27 pence to the euro and to $1.55. "Manufacturing has surprised on the upside for a change. It is curious given the survey evidence from the CBI and CIPS," said Philip Shaw, chief economist at Investec bank in London. "It will help the Chancellor give a less downbeat assessment of the UK economy on Wednesday and as for the MPC, they will probably be happy to wait and see for the time being." The Bank's Monetary Policy Committee meets on Wednesday and Thursday with economists suspecting it will leave its key repo rate steady at 3.75 percent but acknowledging that another cut is possible due to recent signs of economic weakness.
Analysts, however, cautioned that it was too early to assume Britain's hard-pressed manufacturing sector might have turned the corner. "It's not easy to tell. I still see further weakness coming through on the manufacturing side going forward. Things are still gloomy out there," said George Buckley, economist at Deutsche Bank in London.
BROAD-BASED RECOVERY
The ONS said the monthly gain left output 0.6 percent lower than a year earlier. The three-monthly numbers, which iron out monthly distortions, showed a fall of 0.2 percent in the three months to February, giving an annual drop of 0.7 percent. The broader measure of industrial output, which includes North Sea oil and gas production, showed a rise of 0.7 percent on the month, the best performance since last July. That gave an annual rise of 0.1 percent -- the first increase in two years. The ONS said that most of the rises in manufacturing subsectors were small except for machinery and equipment which rose 2.2 pct on the month after four months of decline. The electrical and optical equipment subsector saw a drop of 0.5 percent on the month but was up 1.5 percent in the latest three months. Computer output was 1.2 percent down in February from January but was up 5.5 percent in the latest three months.
Monday's news contrasted with recent data from the Chartered Institute of Purchasing and Supply (CIPS)/ showing the services sector shrank in March for the first time since December 2001, and a Confederation of British Industry (CBI) survey showing manufacturers' expectations about their factory output in coming months were at their lowest in over a year. The manufacturing output figures are the first piece of positive data on the UK economy for some time so will come as a relief to financial markets which had begun to wonder if the world's fourth largest economy was in serious trouble. "While the output of consumer durable goods has declined by almost one percent since the end of last year, the output of investment goods has jumped by around two and a half percent," said Simon Rubinsohn, economist at Gerrard Limited. "It may be premature to jump to too many conclusions just yet, but the trend in the production of investment goods has in the past often been a good lead indicator of business investment itself," he said.//