Manufacturers miss out on Britain's boom

The contrast between the fortunes of manufacturing industry and services could not have been revealed more starkly than by new figures on investment yesterday.

Manufacturing investment fell by 8 per cent in the year to the final quarter of 1996, with the weakness concentrated in the core engineering industries. The level of investment in manufacturing last year was 15 per cent lower than in 1979.

The Labour Party pounced on the figures to counter the Government's new election slogan that "Britain is booming". Gordon Brown, shadow chancellor, said: "What we are essentially seeing is the reduction in capacity because of the failure to invest in manufacturing, that is exactly the problem that has bedevilled us in every previous recovery."

At the same time, however, investment in services and construction has increased sharply. In services, capital expenditure climbed 5 per cent in the latest quarter to a level 10 per cent higher than a year earlier. This matches its record in 1989, at the height of the last boom.

The gap between manufacturing and services is reflected in diverging regional economic performance, according to consultancy Business Strategies Ltd (BSL). Growth in services helped make London the fastest growing part of the country in 1996 despite a drop in manufacturing output, followed by the North, and Yorkshire and Humberside.

Business services such as accountancy, computer services and consultancy are performing especially well, according to BSL's latest regional report. Research director Neil Blake said: "This will bring the capital's growth this year close to the peak of 4.6 per cent it achieved in the boom year of 1986."

The consultancy joined other forecasters this week in warning that interest rates will need to rise soon after the election. Bridget Rosewell, BSL executive chairman and one of the Chancellor's independent advisers, said: "Even though inflation is currently on a downward path, robust growth this year is expected to stoke up problems for the future years.

Interest rates would go up later this year, no matter who won the election. She warned that a slowdown would follow in 1998 and the year after.

Few City experts believe Kenneth Clarke will bite the bullet and raise interest rates after his 10 April meeting with the Governor of the Bank of England, because of the real risk that this would trigger higher mortgage rates just before the general election.

Some analysts were sceptical about yesterday's official figures on manufacturing investment because they paint a picture so much weaker than business surveys would suggest.

Kevin Darlington at Hoare Govett said under-recording of manufacturers' capital spending could explain why GDP measured as the sum of different kinds of expenditure had fallen behind the measure based on output.

Economists also disagreed over how much manufacturing matters. Adam Cole at brokers James Capel said there was a real danger that weakness in manufacturing would undermine the balance of payments.

On the other hand, David Hillier at BZW said it was sensible for the economy to focus on services. "We can't compete in manufacturing with tiger economies paying pounds 2 an hour."