Factory figures ease rate pressure

Industry leaders declared a temporary ceasefire in their campaign for lower interest rates yesterday after government figures showed the first signs of the long awaited recovery in the battered manufacturing sector.

Britain's factories surprised City forecasters with a 0.5% rise in output in July, the sharpest increase since November, and the second month in a row that the sector has expanded. "This confirms our assessment that the sector is now staging a welcome but fragile upturn, after a deep and prolonged recession," said David Kern, economic adviser to the British Chambers of Commerce. "But the recovery still faces many hazards."

Mr Kern urged the Bank of England to refrain from raising rates from their present 48-year low until the recovery was more secure and firmly based. The Bank surprised the City by cutting rates to 3.5% in July and the markets now expect the next move to be up.

"The third quarter appears to be getting off to a good start for activity," said Adam Cole, economist at Crédit Agricole Indosuez. "As such, the main debate on the [rate-setting] monetary policy committee will be the timing of the first rate hike."

Forecasters at the National Institute of Economic and Social Research said the summer has seen strong economic growth after six months of near stagnation with output in the economy expanding by 0.8% in the three months to July. "The strength of the recovery has been greater than we expected so far and makes an interest rate rise likely this autumn," said NIESR.

Strong sales growth on Britain's high streets confirmed the picture of a gradual pick-up in the economy. Sales rose 2.1% in August according to the British Retail Consortium, and were 5.1% higher than a year ago. The BRC said hot weather appeared to have deterred shoppers in the first week of the month, but normal sales resumed once the temperatures cooled.

Consumer spending poses a dilemma for the Bank. If households resume the debt-fuelled spending binge the economy may overheat. A sudden collapse in spending would be equally alarming.

The office for national statistics said there were rises in seven of the 13 manufacturing subsectors, although 80% of the rise came from the electrical and optical sector, which includes computers.

The wider measure of industrial output, which includes North Sea oil and gas production, rose 0.3% on the month, in line with forecasts, to stand 0.4% lower than a year earlier.

· Angry unions convening in Brighton for the TUC conference yesterday urged ministers to do more to revive manufacturing. Despite positive signs from the official government industrial production figures yesterday, the unions unveiled surveys showing more than one million workers in the industrial heartlands of England and Wales giving up work entirely and only a handful of redundant manufacturing workers finding new jobs within the sector.

The GMB union, drawing on an analysis by consultants Nomis at Durham university, said 1.04 million or 3.3% of people of working age were classed as economically inactive by the 2001 census.

A survey by engineering union Amicus found that only 13% of manufacturing workers who lost their jobs found another one in the sector within 12 months, while 61% were still without work and, of the 37% who found jobs, almost two-thirds were not in manufacturing. Almost two-thirds who had found a new job earned less, their salaries dropping by an average 40%.