Manufacturing surge adds to optimism over economy

MANUFACTURING grew much more strongly than expected in June, suggesting the country’s recovery is broadening just as the Bank of England prepares to set out its plan for steering the economy back to health.

Car sales also rose, house prices continued to climb and British retailers had their best month since 2006.

Along with Monday’s purchasing managers index showing the services sector growing at its fastest in more than six years, it all confirmed a rebound that was unheralded just a few months ago. There are some concerns, however, that much of it is being driven by easy lending and increased debt.

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Manufacturing rose by 1.9 per cent in monthly terms, stronger than even the highest forecast in a poll of economists and its fastest growth since July of last year.

All 13 components of the manufacturing index showed growth for the first time since June 1992, the Office for National Statistics said.

Output in the industrial sector overall – which makes up about one sixth of Britain’s economy – climbed 1.1 per cent from May, well above forecasts for a 0.6 per cent rise and also its strongest monthly pace since July 2012.

Yields on 10-year government debt hit their highest level in a month after the manufacturing data and sterling rose.

Other data yesterday showed British house prices rose in July at their fastest annual pace in nearly three years and retail sales were 3.9 per cent higher than a year earlier.

UK car sales, meanwhile, grew at an annual 12.7 per cent for the month, prompting the trade industry group SMMT to increase its forecast for the year.

After two years of stagnation, Britain’s economy has shown signs of recovery but nonetheless the Bank today is expected to try to persuade markets, companies and households that interest rates are unlikely to rise soon.

George Buckley, an economist with Deutsche Bank, said the signs of recovery might actually provide more encouragement to the Governor Mark Carney to give so-called forward guidance about future interest rates in order to prevent a rise in yields from smothering the still weak economy.

“He is likely to argue that low levels of output mean the economy is fragile, thus his desire to insulate the front-end from better growth outturns,” Mr Buckley wrote.

The economic recovery so far has relied largely on higher consumer spending, itself helped along by easy finance.

Economists said the manufacturing data offered hope that the recovery was building a more solid foundation.

Victoria Clarke, an economist at Investec, said yesterday’s data “points towards the UK’s recovery being a bit more broad-based”, rather than just being in the dominant service sector.