Manufacturing confidence motors to a 16-year high

'Solid demand' from home and overseas markets

Having endured its worst downturn in three-quarters of a century, the manufacturing sector is now powering ahead, with the fastest increase in output since 1994.

The latest survey of business sentiment from the Chartered Institute for Purchasing and Supply (Cips) puts confidence at its highest in 16 years. At 57.2, the March reading is up from 56.5 in February.

Scores above 50 are usually a leading indicator of future expansion, and the Cips index has been above that level for six months. It suggests that the British economic revival may be stronger than expected as the year wears on, although manufacturing represents only 12 per cent of the economy.

The unexpectedly sharp fall in manufacturing output in the official data for January may have been the product of adverse weather conditions rather than, as some feared at the time, an omen of an early "double dip" in the economy.

The Cips reported that companies are experiencing "solid demand from both domestic and overseas markets", which they attributed to the recovery in global conditions, the launch of new product lines and clients rebuilding inventories.

However, policymakers may be disturbed to see the reading for export orders falling back last month. The failure of exports to respond to the 25 per cent duration in sterling since the start of 2007 has been frustrating the authorities for some time.

The crisis in the eurozone and a fallback in growth in our largest export market may be responsible for the setback. The Chancellor, Alistair Darling, this week told British exporters to get their "foot in the door", rather than take the benefit of depreciation through maintaining overseas prices and bolstering profit margins.

Rob Dobson, the senior economist at Markit, which carries out the survey of managers on behalf of the Cips, warned: "The recovery is still in its infancy and levels of output and demand remain well below their pre-recession peaks."

Meanwhile, the Bank of England's latest Credit Conditions Survey showed that the demand for credit by private non-financial corporations in the first quarter of the year rose more strongly than anticipated for small and medium-sized businesses: demand was expected to rise further over.

Vicky Redwood, the senior UK economist at Capital Economics, added: "The lack of credit does not appear to be holding back the recovery in the industrial sector. But that probably just reflects the fact that manufacturers have so much unused capacity that they can increase output without needing to borrow money to invest. We expect the weakness of bank lending to be a key factor preventing the recovery from gaining more momentum."