Manufacturing set to bounce back after dip

The recovery was forecast after official figures showed that production dipped 0.1 per cent in December - its first decline in eight months - after a 0.6 per cent rise in November. Economists had been looking for a modest increase.

Severe winter weather is likely to have hit the sector hard.

The Office for National Statistics said the wider industrial output measure rose 0.5 per cent on the month - largely in line with analysts' expectations and driven by a surge in electricity and gas output.

The figures are unlikely to have had any impact on the Bank of England's decision yesterday to peg interest rates at their historic low of 0.5 per cent for at least another month as it balances fears of a double-dip recession with rising inflation.

Howard Archer, chief UK economist at IHS Global Insight, said the dip in manufacturing output had been unexpected but pointed to the bad weather as a "significant" dampening factor.

"All the indications are that the manufacturing sector is currently still in good shape," he added. "Nevertheless, the concern is that (manufacturers] will find life becoming more difficult as 2011 progresses as stock rebuilding draws to a close and tighter fiscal policy weighs on domestic demand.

"There is also the risk that problems in the eurozone could dampen foreign orders."

National Australia Bank economist David Tinsley said: "I'd put the fall in manufacturing in December down to the weather and expect a hefty bounceback in January. It's really the service sector and the construction sector in the UK that we've got to worry about."

The closely-watched purchasing managers' index for the manufacturing sector, published earlier this month, hit its fastest monthly growth rate for 19 years. However, manufacturing only accounts for about 15 per cent of the UK economy.

Trade data released on Wednesday showed that Britain's deficit in goods with the rest of the world hit a record high in December - albeit partly due to weather disruption to exports and a one-off jump in aircraft imports.

David Kern, chief economist at the British Chambers of Commerce, said more needed to be done to back manufacturing and international trade.

"The sector faces many challenges in the months ahead, not least coping with the impact of the government's deficit-cutting programme," he said.

"Given the uncertain background facing the economy, it is important to strengthen and reinforce the manufacturing recovery.

"In particular, businesses must be able to retain valuable skills and UK exporters should not be at a disadvantage in key areas such as trade finance, export insurance and trade promotion."Lee Hopley, an economist at manufacturing employers' organisation EEF, said an increase in interest rates yesterday would have done little to alter the path of inflation in the short term, which is being driven by higher commodity prices and taxes.

The CBI business lobby group said it expected rates to rise in the second quarter of 2011 as inflationary pressures intensify.

Money markets show a quarter-point rate rise is fully priced in by May, with at least one additional hike by the end of 2011.

By May, central bank policymakers will have more information about how the economy is weathering the UK government's fiscal tightening and whether a 0.5 per cent contraction in fourth quarter GDP was largely related to the extreme December weather.