Falling figures jeopardise economic growth

Weaker than expected data in the services and manufacturing sectors today cast doubt on growth prospects for the UK economy.

Figures from the Office for National Statistics showed that manufacturing output fell 0.2% in February, in what analysts described as disappointing figures.

The drop - mainly due to a decline in pharmaceutical production from near-record levels - came against forecasts of a 0.2% rise. This was the first monthly decline since October 2005.

Overall industrial production also unexpectedly fell, by 0.3% compared to expectations of a 0.2% rise, leaving it 1.5% lower than a year earlier. Manufacturing production accounts for 80% of all industrial output.

The fall in manufacturing output came despite faster growth in Europe, indicating that manufacturers are finding it hard to capitalise on an economic pickup in the eurozone.

"Nevertheless, industrial production still looks certain to have made a positive contribution to growth in the first quarter of 2006, after contracting through 2005," said Howard Archer of Global Insight consultancy.

A separate report from the Chartered Institute of Purchasing and Supply also surprised analysts. The institute's purchasing managers' index fell from 58.9 in February to 57.4 last month.

A reading above 50 signifies expansion so the services sector, which accounts for the bulk of UK economic activity, is still growing. But the figure was the sharpest monthly drop since December.

"The.....continued below

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value of these releases is that it raises further question marks about whether the current picture of growth around trend will be sustained," said John Butler of HSBC.

The softer industrial production data and service sector survey should have little impact on the Bank of England's interest rate decision tomorrow.

The Bank's monetary policy committee is expected to leave borrowing costs at 4.5% for the eighth month in a row amid concern over the possible inflationary impact of a strengthening housing market and higher energy prices. But some analysts believe that weaker growth later in the year will pave the way for lower rates.

"We continue to believe that lacklustre consumer spending will hold back overall economic activity and limit inflationary pressures over the coming months," Mr Archer said. "Consequently, we still believe interest rates will eventually be trimmed by a further 25 basis points, although not until August at the earliest."

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