Factories struggle but shoppers aid economy

Factories struggle but shoppers aid economy

Widespread bargain-hunting during the winter sales provided a boost to Britain's retailers last month and helped to offset the damage of a faltering recovery in manufacturing, it emerged last night.

Fresh evidence of the UK's two-speed economy came when upbeat figures for consumer spending from the British Retail Consortium co-incided with the second consecutive monthly fall in factory output.

Industry said the fragility of manufacturing underlined the dangers of last week's increase in interest rates from the Bank of England and the rising strength of the pound, which hit an 11-year-high of just over $1.86 against the dollar in London yesterday.

The BRC warned that higher sales volumes for its members in January had only been possible because of price reductions designed to attract consumers reluctant to buy at full price in the run-up to Christmas. Activity in the shops hit record levels in the first 10 days of the sales but fell back to more modest levels.

Sales in January were 6.8% up on a year earlier, the strongest performance since April 2003. Measured on a like-for-like basis, once any increase in floor space was stripped out, the rise was 3.8% over the year, compared with a 0.2% fall in the 12 months to December.

"Retailers benefited from a strong post-Christmas and January sales last month," said David Southwell, director of communications at the BRC. "Whilst volumes were good, the length and depth of the sales hit.....continued below

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margins for many retailers. With so many purchases being postponed until after the Christmas period, these figures cannot be taken as evidence that the recent sluggish trend will not continue, especially after last week's unnecessary rate rise." Government figures for manufacturing revealed a 0.1% fall in output in December, the latest month for which data is available. Analysts had been expecting a bounce-back in manufacturing following the 0.6% fall in production in November, particularly since the recent survey from the CBI was upbeat.

The Office for National Statistics said there had been significant monthly falls in electrical and optical equipment industries, which includes computers and mobile phones, and in the chemical industries.

Over the three months to December, considered a better guide to the underlying trend, manufacturing output rose by 0.2% and was 1.1% higher than in the same quarter of 2002. Between 2002 and 2003, as a whole, it was flat.

David Kern, economic adviser to the British Chambers of Commerce, said manufacturers would now be hoping to avoid further interest rate increases. "The sector is still weak and after a long and painful recession, the welcome signs of recovery we saw earlier in the year could easily be derailed and go into reverse."

Although manufacturing exports are being hindered by the stronger pound, the fall in the dollar has meant imported fuels and raw materials have become cheaper for industry. Separate government figures for producer prices out yesterday showed input prices fell by 1.1% in January to leave them unchanged over the past 12 months. The cost of goods leaving factory gates rose by 0.2% on the month and by 1.6% over the past year.