UK factories perk up

Do better times lie ahead?

Britain's struggling manufacturing sector grew in July after eight consecutive months of contraction, a survey has shown.

The Chartered Institute of Purchasing and Supply (CIPS) said its monthly manufacturing index for July climbed to 50.9, up from 49.5 in June, and its highest reading since May last year.

Any reading above 50 denotes expansion, while a score below 50 indicates contraction.

The figure wrong-footed City analysts, most of whom had predicted that the manufacturing economy would shrink for the ninth month running.

The sector's improved performance stirred hopes that it could be on the road to recovery after struggling to avoid outright recession for much of the last three years.

"The rise... suggests that the manufacturing sector could expand quite robustly in the third quarter," said Alan Castle, economist at Lehman Brothers.

Export weakness

The CIPS survey showed that British factories benefited from rising domestic orders while a weaker dollar reduced input prices.

The combination of stronger domestic demand and cheaper raw material costs helped offset a further decline in export orders.

The export-oriented manufacturing economy has been hit hard over the last three years by a slump in demand from mainland Europe due to the strength of the pound against the euro.

The euro's partial recovery against the pound since the beginning of this year is expected to stimulate export demand.

However, the boost from the more favourable exchange rate has been dampened by weak growth in the eurozone economies.

Rate cut prospects

Although dwarfed by the economically dominant UK services sector, the manufacturing economy is a major source of jobs, employing one in five British workers.

The manufacturing sector's persistent weakness has put pressure on the Bank of England to cut interest rates over the past three years, although it has frequently been reluctant to do so for fear of overstimulating consumer spending.

The latest evidence of renewed strength in the manufacturing sector, which comes hard on the heels of figures pointing to record growth in consumer borrowing, has made a further cut in interest rates in the months ahead less likely.

The Bank of England last cut borrowing costs on 10 July, when it trimmed the base rate by a quarter of a percentage point to a 48-year low of 3.5%.