Orders and output `grow at fastest rate for 18 months'

Orders and output are growing at their fastest rate for 18 months, according to the latest survey of manufacturing by the Confederation of British Industry. One of the key pieces of economic news before next week's monetary meeting, it also showed that business confidence has increased for the second quarter running while investment plans have returned to their highest level since 1989.

Andrew Buxton, head of the CBI's economic affairs committee and chairman of Barclays Bank, said the Chancellor of the Exchequer, Kenneth Clarke, "might get away with holding rates". Despite the recovery in output, manufacturers' costs and prices have fallen sharply.

Although the CBI's quarterly survey was not uniformly buoyant, City analysts said it pointed to a brighter economic outlook. "It is not sensational but it does confirm that manufacturing is improving," said Kevin Gardiner, an analyst at Morgan Stanley.

Adam Cole at brokers James Capel said: "It shows that the correct policy at the moment would be higher taxes rather than higher interest rates, to encourage manufacturing rather than consumers. In reality, we'll probably get the reverse."

Angela Knight, Economic Secretary to the Treasury, said the results showed that improved confidence was reaching new areas of the economy. But Margaret Beckett, shadow secretary for trade and industry, said: "Any recovery will be modest, short-lived and possibly jobless."

The most upbeat aspects of the survey, which covers the four months to October, were confidence, orders and investment. The unadjusted balance of manufacturers who were more rather than less optimistic was 8 per cent, the same as July. But adjusting for the normal seasonal confidence dip in October, there was a sharp underlying rise from 11 to 17 per cent in the optimism balance, one of the best single indicators of GDP growth. In line with the improvement in confidence, investment intentions were the strongest since April 1989.

Total new orders increased at the fastest pace since last April, and output at the fastest rate since last July. Although the rise in output was less than expected, companies' expectations have proved too high for the past 18 months.

Two areas of slight weakness in the survey were stocks and jobs. There was a small increase in stocks of materials and works in progress, while stocks of finished goods levelled off rather than falling as expected. Jobs in manufacturing fell slightly. A sharp fall had been expected in the past four months, but is now expected to take place during the next four.

The Scottish CBI is to launch an inquiry into why Scotland appears to be missing out on the recovery. Although the latest survey showed a more positive picture, Lord Younger, the Royal Bank of Scotland chairman and head of the inquiry, said: "A number of areas have not hitherto shared fully in the UK economic recovery."