Manufacturing and trade boost economy

THE manufacturing sector unexpectedly jumped into recovery at the end of last year, with production levels rising at their highest rate since May 2004.

Production rose 0.6% in December, exceeding the 0.3% gain predicted by analysts, fuelling speculation that interest rates could rise again. Office of National Statistic figures also show strong upward reversions from previous quarters as late responses are filtered into the figures.

The economy was also boosted by trade figures showing the UK's trade deficit fell to £3bn in December from £3.3bn the month before. On a quarterly basis, the deficit slipped to £9.9bn in the final quarter from £10.2bn in the third quarter - further evidence that consumer spending is slowing.

The rise in the latest manufacturing reading will be seen as evidence that the sector is not sliding into recession as many had feared. Additionally, it may mean the preliminary GDP estimate for the final quarter of 2004 will be revised upwards by 0.1 points.

Both sets of figures exceed analysts' negative forecasts and could signal a further Bank of England base rate rise. The Bank is expected to sit on its hand until first-quarter data filters through, but Gerrard economist Simon Rubinsohn has pencilled in a 0.25% rate rise for May.

He said: 'It is true that manufacturing output over the whole of the fourth quarter is still below the level reached in the second quarter but the official numbers no longer point to the sector struggling in recessionary conditions.

'There were also positive revisions to the numbers for mining and oil and gas extraction. This has fed through into the wider measure of industrial production.'

The figures comes on the day the Confederation of British Industry warned that thousands of manufacturing jobs could be lost in the UK over the next three months. Its quarterly survey showed confidence in the sector has plummeted since the start of the year, with the sharpest fall in the key manufacturing region the West Midlands.

Philip Shaw, chief economist at Investec, said that more economic data needed to be produced before the Bank would make a decision. Referring to the statistics, he said: 'A little better than expected, overall there isn't going to be a material impact on the outlook for interest rates, we continue to see rates on hold at tomorrow's MPC meeting.'