Fall in factory output hurts Labour's election focus on the economy

Manufacturing output has fallen to pre-2001 levels, data published yesterday showed.

On the same day the Bank of England left interest rates steady at 4.75% for the eighth month running, the Office for National Statistics said output fell 0.5% between January and February. It also revised downwards the January assessment of a rise to unchanged.

The Conservatives leapt on the figures, saying excessive tax and regulation under Labour had led to the loss of a million manufacturing jobs since 1997.

The manufacturing sector's output index fell to 98.8, below the 99.8 figure at the time of the last election and only marginally above the 97.2 figure of May 1997. The last of the regular baseline revisions, to 100, was made in 2001.

"This is yet another indication of the problems caused by excessive tax and regulation. After eight years, a million jobs have been lost in the sector while manufacturing profitability is half what it was in 1997," said Stephen O'Brien, the shadow trade and industry secretary.

While Labour is making the economy a centrepiece of the campaign, manufacturing is the main blot on its record. UK manufacturers export much of what they make and have been squeezed in overseas markets by the strength of the pound and competition from countries such as China. They are also facing record oil prices, which boost costs. Manufacturing now accounts for less than a fifth of the economy.

Official figures confirm that almost a million jobs have been lost since 1997 and the sector employs only 3.2 million of a total UK workforce of more than 28 million. While it has shed jobs new ones have been created in the services and public sectors, pushing employment to a record high.

A government source defended Labour's record: "We will take no lectures about manufacturing from the opposition. Under the Tories, manufacturing output fell by 7%, investment by 28% and millions of jobs were lost.

"While monthly growth rates tend to be volatile, growth in the three months to February compared with the previous three months was positive." Yesterday's manufacturing data showed February's weakness was widespread, as output fell in nine subsectors while four rose.

The worst performing subsectors were chemicals and man-made fibres, which decreased 2%, and pulp, paper, printing and publishing fell by 1.3%. These two sectors accounted for most of the overall monthly decrease.

The National Institute of Economic and Social Research estimated that the new data meant the economy overall probably grew only 0.5% in the first quarter of the year, down from 0.7% in the fourth quarter of last year. This means the year has got off to a slower start than either Gordon Brown or the Bank of England were expecting.

The Bank's decision to hold interest rates steady was widely expected in the City and the decision means there can now be no rate rise before the election.

Economists had been expecting the MPC to raise rates to 5% or higher this spring to keep labour market inflation pressures in check, but growing evidence that consumer spending is slowing and the increasing fragility of the once booming housing market have led many to think rates may have peaked.