Manufacturing growth hits record high but costs soaring

MANUFACTURING activity in Britain is growing at its fastest pace since records began but rising factory costs have also heightened the prospect of interest rate hikes.

The Chartered Institute of Purchasing & Supply's manufacturing figures released yesterday revealed record growth for new orders and employment driven by higher demand from both domestic and export markets.

Institute chief executive David Noble said the data provided the "much-needed kick-start to 2011" after last week's shock news that the economy contracted by 0.5 per cent in the final quarter of 2010.

But the survey also showed record input costs and the biggest leap in factory gate prices since August 2008. The pound rose to its highest level against the US dollar for more than two months as the figures were seen as a further sign that rates may need to rise to curb inflation.

The CIPS manufacturing index, where a reading of over 50 indicates growth, surged to a better-than-expected 62 in January from an upwardly revised 58.7 in December and the fastest growth seen for 19 years.

Alan Clarke of BNP Paribas said the figures were "incredibly strong" and provided evidence of a rebalancing in the economy towards manufacturing. But he added a note of caution over the implications of rising costs on margins.

"We are still concerned that profit margins are being squeezed because input prices are incredibly high and output prices aren't rising as much and that could lean down on employment and activity."

Samuel Tombs at Capital Economics added he was sceptical that the sector "will manage to keep growing at this sort of pace for much longer".

Experts said the rise in factory gate prices would also heap further pressure on the Bank of England to raise interest rates as the economy is buffeted by soaring inflation.

Ross Walker of RBS said the figures brought forward the risk of a rate rise "sooner rather than later and brings February into play as a possibility".

Expectations for a rate hike have been building since news was revealed that two Bank policymakers had voted for an increase at the January meeting after Consumer Prices Index inflation rose to a far higher-than-expected 3.7 per cent in December.

Bank governor Mervyn King also said inflation was more of an immediate concern than growth as he warned that households were set for the worse squeeze on finances since the 1920s.The Treasury maintained that the manufacturing figures lent support for its hopes to rebalance growth to the private sector.

A spokesman said: "A growing manufacturing sector is vital if we are to rebalance the economy towards trade and investment in order to have sustainable growth."

Prime Minister David Cameron said: "It is early days, but hopefully the figures are a sign of the kind of rebalancing towards the private sector that we need to see."

David Kern, chief economist at the British Chambers of Commerce, said the figures confirmed that the recovery was still mainly being driven by manufacturing and he urged the government to ensure it helped foster continued growth.

"The recovery is fragile, especially as the austerity programme is now being enforced. We believe that the government must persevere with its deficit-cutting plan to stabilise our public finances. But this must be supplemented with policies to support growth, while the MPC should maintain low interest rates for some time."