UK's manufacturing slips into recession

The figures supported the stance taken by Eddie George, Governor of the Bank of England, and the other doves on the monetary policy committee who have been resisting demands by their hawkish colleagues for a rise in interest rates since January.

Manufacturers have struggled with the strong pound, now apparently on the wane, and the economic and financial crisis in the Asia-Pacific region. Output peaked in July and between the third and fourth quarters of last year it declined by 0.5%.

The worst month was December, but a sluggish performance so far this year has led to a drop of 0.1% in the latest quarter. The technical definition of a recession is two succeeding quarters of falling output.

While manufacturers have struggled to maintain their position in export markets and the strong pound has benefited importers, domestic demand has remained strong, limiting the extent of the downturn in factory output.

Output was 0.3% higher than in March of last year and in the first quarter it was also 0.3% higher than in the same three months a year ago. David Walton, senior economist at Goldman Sachs, said: ''After declining sharply in the fourth quarter of 1997, manufacturing output has broadly

stabilised in early 1998.''

The pound has fallen back from the nine-and-a-half year high of DM3.10 it hit at the end of March. Last night it was trading at around DM2.90. Financial markets reckon UK rates have peaked, while the next move in Continental rates is expected to take them higher in preparation for the advent of a

single currency in January.

Adam Cole, UK economist at HSBC Markets, said: ''Manufacturing output was weaker than expected and leaves industry technically in recession. Sterling's softness will help manufacturers in the longer term, but at DM2.90 industry remains uncompetitive and exports will remain weak.''

The more broadly based industrial production, which includes North Sea oil and gas extraction and the output of the electricity, gas, and water utilities, declined by 0.3% in the first quarter, but it jumped by 0.7% between February and March because of a recovery in energy output as cold weather returned in March and boosted consumption of gas and electricity.

Figures from the British Retail Consortium provided further evidence of a slowdown in sales as higher mortgage costs took their toll on consumer spending.

The monthly sales monitor recorded a 5.7% year-on-year increase in the value of retail sales in April, but the figures were distorted by the inclusion of Easter week, which fell in March last year.

Year-on-year growth had declined to 0.4% in March for the same reason. The average for the latest two months was 2.7%, well below the hectic pace of last summer. The figures point to a rise of 0.5% in sales volumes in April in the official figures from the Office for National Statistics next week.

Bridget Rosewell, chief economic adviser to the consortium, said: ''These results are further evidence that retail sales growth has moderated. For some months we have been arguing that the retail sales figures support the stance of monetary policy in leaving rates unchanged. The more buoyant figures for April are the result of a late Easter, which to some offset March's weakness.''

Factory gate prices rose just 0.1% in April, reducing the year-on-year increase from 1.1% in March to 1%. Seasonally adjusted core output prices, which exclude food, drink, tobacco, and petroleum, were unchanged last month, leaving them 0.2% higher than a year earlier, the lowest annual increase since July 1967.

Seasonally-adjusted input prices, which measure industry's fuel and materials costs, continue to benefit from the strength of sterling. In April, they fell by 0.9%, but over the latest 12 months the decline was 9%,

compared with 10.1% in March.

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