October 7, 2010 / 8:35 AM / 10 years ago

Factory output rise fastest since 1994

LONDON (Reuters) - Manufacturing output rose for a sixth consecutive month in August and by its fastest annual rate in over 15 years, data showed on Thursday, easing fears the economy is on the verge of a sharp downturn.

A worker stands on the production line at the Nissan car factory in Washington, England March 20, 2009. REUTERS/Nigel Roddis

The figures came hours before the Bank of England’s October monetary policy decision and provided welcome relief to some investors after mortgage lender Halifax reported the biggest monthly fall in house prices on record.

Sterling hit a two-month high against the dollar and gilt futures extended losses as investors took the view the Bank of England was less likely to embark on a second round of quantitative easing in the coming months.

Manufacturing output rose 0.3 percent in August — slightly above economists’ forecasts and following an upward revision of July’s reading to 0.4 percent. That lifted the annual rate to 6.0 percent from 5.0 percent in July, the fastest rate of growth since December 1994.

The broader measure of industrial output also expanded by 0.3 percent on the month, with the annual rate rising to 4.2 percent — again the highest since 1994 — from 2.0 percent in July.

However, that annual growth rate was flattered by comparison with weak oil and gas output a year ago due to maintenance work, and analysts noted that industrial production remained well below its level before the financial crisis.

“These are good readings to be honest, but still it’s going to take a long time for output more generally in the UK to get back to its peak level,” said George Buckley, economist at Deutsche Bank.

The monthly increase in manufacturing output was driven by food, transport equipment and the “other manufacturing” category. Output in the publishing, textiles and machinery sectors fell.

The economy grew by a surprisingly strong 1.2 percent in the second quarter — its fastest rate in nine years — but economists think this was a one-off and expect growth to slow sharply in the second half of the year.

The main area for debate is how sharply the economy will slow in the face of a weak overseas recovery and looming government spending cuts

The central bank is widely expected to keep interest rates unchanged at 0.5 percent, where they have been since March 2009, although this outcome is likely to mask a vigorous discussion among policymakers that may result in a 3-way policy split.

Bank policymaker Adam Posen has warned that many industrialised countries, including Britain, are at risk of the kind of stagnation that Japan suffered in the 1990s and has suggested more quantitative easing may be needed.

Others on the central bank’s monetary policy committee are more concerned about persistently above-target inflation. One member, Andrew Sentance, has voted consistently for higher interest rates since June.

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