Output rises despite squeeze on profits

The strong pound has had surprisingly little effect on manufacturing production but is squeezing profit margins, new figures suggested yesterday. The growth in output returned to its highest rate for more than a year and a half in April, while inflation at the factory gate remained subdued.

Alongside the surprise jump in output, a separate survey indicated that retail sales growth picked up in May. But the British Retail Consortium (BRC) insisted there was no sign of a runaway boom on the high street.

In the light of this fresh evidence of the economy's robust health, ahead of the Chancellor's Mansion House speech on Thursday, experts were divided in their prescriptions. Some City analysts saw yesterday's figures as a further vindication of the Bank of England's decision to raise interest rates last week.

Michael Dicks, UK economist at Lehman Brothers, said: "All parts of the economy seem to be growing at an above-normal pace." To head off future inflation the Bank of England would have to raise rates even further unless next month's Budget increased the tax burden, he said.

The BRC yesterday cautioned against a tough Budget. "Retailers accept the need for recent modest changes in interest rates but see no case for tax rises," said Andrew Higginson, chairman of its economics committee.

He said there was little sign yet of a big boost to the high street from building society windfalls, except in sales of computers.

But others urged tax increases rather than further rises in interest rates, reckoning the balance of the economy was tilted too heavily against industry.

"Growth in manufacturing is decent but there is no room for complacency just because domestic demand is masking the weakness in exports," said Simon Briscoe at Nikko Europe.

Manufacturing output rose 0.6 per cent in April, taking the year-on-year growth to 2.3 per cent. This was the strongest pace since July 1995, and came as a surprise following the virtually flat first-quarter figures.

There was little sign that export-dominated industries were suffering more than the rest. In the latest three months, production of electrical equipment was up 1.2 per cent and transport equipment was up 2.9 per cent during April.

The broader indicator, total industrial output, jumped by 1.2 per cent during the month thanks also to a surge in oil and gas output and electricity and water supply. Both components are very erratic.

At the same time, prices manufacturers charged at the factory gate rose 0.1 per cent during April, taking their annual rate of increase up slightly to 1 per cent. Although "core" output price inflation, excluding volatile food, tobacco and energy prices, increased a fraction it remained subdued at 0.6 per cent.

The prices paid for materials jumped 0.6 per cent during the month, a bigger-than-expected rise due mainly to higher oil prices and a slight increase in food prices. Its year-on-year pace of decline slowed from minus 10.7 per cent to minus 9.1 per cent in April.

"If people conclude that manufacturers are doing remarkably well despite the pound, they are wrong. There is a lot of pain beneath the surface," said Robert Barrie, chief economist at BZW. The combination of flat output prices and rising volumes indicated profit margins were suffering, he said.

The BRC survey reported that the year-on-year growth in the value of sales on a like-for-like basis increased to 4.8 per cent in May from 4.1 per cent in April, and total sales growth picked up to 8.3 per cent from 7.4 per cent. Both are growing more slowly than a year ago.

Figures on unemployment and earnings, due tomorrow, and retail prices on Thursday, will provide more indications about the extent to which inflationary pressure is building up. City experts expect the underlying inflation rate to remain at its 2.5 per cent target or edge lower, but most predict it will climb later this year.

The pound ended slightly lower yesterday, down two pfennigs against the German mark at just over DM2.79, as the dollar plunged to six-month low against the Japanese yen.