Gap between manufacturing and services starting to narrow

Manufacturing industry is showing signs of recovery from its earlier slowdown, while growth in services has slowed from its unsustainable pace, according to a new survey.

Manufacturing industry is showing signs of recovery from its earlier slowdown, while growth in services has slowed from its unsustainable pace, according to a new survey.

The British Chambers of Commerce said these indications of better-balanced growth in the economy were "tentative", however, because of the continued strength of the pound against the euro.

The pound jumped to a five-month high against the euro yesterday. It ended sharply higher at 0.5872p, while its index against a range of currencies rose 1.4 to 109.7.

The survey showed an improvement during the third quarter in confidence, sales and orders both at home and abroad, and investment intentions in manufacturing. Services remained stronger than manufacturing but the movement in the latest quarter went in the opposite direction.

In a generally upbeat report the BCC added that raw materials costs had continued to rise. This took the balance of companies intending to raise prices higher in both sectors.

The survey said that although recruitment difficulties in both sectors were at their most severe since mid-1998, pay pressures had actually eased. This runs counter to other recent business surveys, which have found the tight jobs market putting upward pressure on pay settlements. Two thirds of employers in services and nearly three quarters in manufacturing said it had become harder to find staff.

The survey backs the argument made by Sushil Wadhwani, one of the Monetary Policy Committee's prominent doves, that the structure of the labour market has improved, taming wage growth. However, speaking yesterday at a conference organised by HSBC, he said: "It will remain especially important to monitor closely actual developments as we attempt to form difficult judgements in this area."