Fresh slump in manufacturing

MANUFACTURING output unexpectedly fell in July for the second month in a row as the production of beer and pharmaceuticals plummeted.

The Office for National Statistics said manufacturing output fell by 0.2% against expectations of a 0.5% rise. This followed a 0.7% fall in June and was the first back-to-back decline since October 2002. The annual growth rate was just 0.9%.

The Bank of England had been expected to keep rates on hold at 4.75% at the monthly meeting of the monetary policy committee this Wednesday and Thursday, following signs that the UK property market may have turned. Last week, lender Halifax said house prices fell 0.6% in August.

The surprise fall in manufacturing output cemented expectations that borrowing costs are close to their peak. Most economists expect one more quarter-point rate hike in November.

'Today's weak data provides further evidence that the much talked of 'soft spot' [in the recovery] has spread to the

industrial sector,' said Simon Rubinsohn, chief economist at broker Gerrard. 'This, coupled with the signs of a loss of momentum in the housing market and the weak retail figures for August, means that the MPC will certainly do nothing at this week's policy-making meeting.'

Overall industrial production also unexpectedly fell by 0.3%, taking the annual rate to just 0.1%.

But the ONS also revised the back data and industrial production in the second quarter of 2004 is now estimated to have grown by 1.2% instead of 0.9%.

Although the latest manufacturing numbers cast doubt on the scale of recovery in the sector, the chief culprits for the decline were an 11.1% drop in beer production and an 8.3% drop in pharmaceutical output.

The ONS said the decline in the former was probably a hangover from the rise in output seen in June as a result of the Euro 2004 soccer tournament.