UK industrial output weak

Carmakers are still supportive of the euro

Official figures have shown that Britain's manufacturing sector remains stuck in a pattern of sluggish growth.

The Office for National Statistics (ONS) said British manufacturing output climbed 0.2% in June from May to stand 3.5% higher than one year earlier.

The ONS said the annual rise was the sharpest since December 1994, but stressed that the year-on-year comparison was flattered by a downturn in manufacturing activity during the Queen's Jubilee celebrations in June 2002.

When measured over the April to June period, manufacturing output was up by just 0.1% on the year, in a sign that growth in the sector remains weak.

Recent surveys have shown that the economically dominant services sector, in contrast, is growing strongly, while consumer borrowing and spending remains buoyant.

The National Institute of Economic and Social Research (NIESR) said economic growth picked up in the three months to July, in a sign that the economy may be rebounding despite the manufacturing sector's troubles.

NIESR said the eonomy expanded by 0.4% in the three months to July, up from 0.3% during the previous three months.

Rate cut prospects

"This confirms the picture seen earlier in the summer that economic growth is gradually reviving after the poor performance at the start of the year," said NIESR director Martin Weale.

The relative strength of the non-manufacturing economy is expected to reinforce the case for deferring any further interest rate cuts at the Bank of England's rate-setting meeting on Wednesday and Thursday this week.

The imbalance between the two branches of the UK economy has presented the Bank's monetary policy committee with a dilemma since the manufacturing sector first began to slow three years ago.

But it has nonetheless cut rates sharply since February 2001 in an effort to fend off recession amid a sharp downturn in the global economy.

The Bank last cut rates on 10 July, trimming them by a quarter of a percentage point to a 48-year low of 3.5%.

Many City economists are predicting a rise in interest rates by the end of the year as the economy picks up, but the manufacturing sector's persistent weakness could mean than any increase in rates may in fact be postponed until 2004.

Euro support waning

Separately, a poll cited by the Financial Times suggests that British manufacturers are becoming less enthusiastic about the single currency.

The poll, sponsored by consultants Cap Gemini Ernst & Young, suggests that just 45% of UK manufacturing firms believe joining the euro would be good for business, down from 52% one year ago.

The figures will stir fears among pro-euro campaigners that the single currency risks losing one of its core group of supporters within the British business community.

Britain's export-oriented manufacturing sector, which is highly vulnerable to exchange rate fluctuations, has previously been largely in favour of adopting the euro.

Over the last three years, many British manufacturers have been hit hard by the strength of the pound against the euro, although a weakening of the pound this year has relieved some of the pressure.

The latest survey follows a decline support for the euro among the key industry lobby groups such as the Engineering Employers Federation and the Confederation of British Industry.

It suggests that while engineering and automotive firms remain supportive of the single currency, companies in the food drink and tobacco sectors have become less enthusiastic.