Manufacturing 'growing at record rate'

Manufacturing figures offered some economic relief today as data showed activity growing at its fastest pace since records began 19 years ago.

The Chartered Institute of Purchasing & Supply's (CIPS) manufacturing activity index, where a reading over 50 indicates growth, surged to a better-than-expected 62 in January from an upwardly revised 58.7 in December.

Higher demand in the UK and overseas sent the reading to its all-time high, while the figures also revealed record growth for new orders and employment.

CIPS 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% in the final quarter of 2010.

But today's survey added to inflation fears as it showed record input costs and the biggest leap in factory gate prices since August 2008. Experts said this would heap further pressure on the Bank of England to raise interest rates as the economy is buffeted by soaring inflation.

The pound strengthened - rising to its highest level against the US dollar for more than two months - as the market took the manufacturing figures as a further sign that rates may need to rise.

Expectations for a rate hike have been building since news that two Bank policymakers voted for an increase at the January meeting after Consumer Prices Index inflation rose to a far higher-than-expected 3.7% 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 today's manufacturing figures lent support for its hopes to rebalance growth to the private sector as it slashes public spending. 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."

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

ING economist James Knightley added that the wider economy was still highly fragile despite the upbeat manufacturing news.

Nationwide figures today revealed house prices fell 0.1% during January, while Bank of England data showed net mortgage lending at a record low last year.

Mr Knightley said: "While the manufacturing sector is doing very well, the rest of the economy is not nearly as strong. Indeed, manufacturing accounts for only around 13% of gross domestic product (GDP) and with the service sector currently contracting, the overall performance of the UK remains weak."

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