Industry slumps but consumer spending soars

Manufacturing industry displayed yesterday the most depressing figures since the early days of the recovery in 1992, as consumer spending powered ahead, underscoring the split personality of the British economy.

The contradictary figures leave a decision on interest rates hanging in the balance. Pointing to the growing evidence of weakness, many City economists said that when the Chancellor, Kenneth Clarke, next meets Eddie George, Governor of the Bank of England, on 8 May, the chances have increased of a further rate easing.

The outcome of today's local council elections, in which the Conservatives are expected to suffer extensive losses, will add to the political pressure on the Chancellor to fuel the feel-good factor.

"We still think interest rates are on hold as the weakness could still just be temporary, but the chances of a rate cut have increased," said Ciaran Barr at Deutsche Morgan Grenfell.

The April purchasing managers index fell to 48.3 from 49.4 the previous month, while new orders fell at the sharpest rate since September 1992, down to 47.1 compared with 49.9 in March.

The Chartered Institute of Purchasing and Supply said there had been no significant growth in the manufacturing economy in the past 12 months.

"It is a depressing outlook. If you take the headline figure, it is the worst since the 'green shoots' days of 1992," said Peter Thomson, CIPS director-general. Consumer goods manufacturers were the only companies reporting an upturn in production, while output of investment and intermediate goods declined.

"The survey further demonstrates the split in the UK economy, with the manufacturing sector remaining weak," said Tom Rayner of Societe Generale Strauss Turnbull. "The survey shows stock levels are not running down, as was previously hoped, but are actually building up, and suggests that it will be some time before there is any positive news on the UK economy."

At the same time, the weakness of the prices component in the poor purchasing data contained further positive news on the inflation front. It recorded a new low since 1991, suggesting further falls in official producer price inflaton and ultimately retail price inflation are likely, according to Simon Briscoe of Nikko Europe.

"The overall index suggests contraction rather than expansion in the economy for the third month running. There is no chance that base rates will rise in the month ahead, so the balance of probability is now that the next move will be down,'' he said.

Complicating the forecasting equation, however, were consumer credit figures yesterday, which showed bank lending at its highest level in the first quarter since they were first surveyed in 1991.