Manufacturing gloom adds to pressure for rate cut

Output from Britain's industrial sector slipped into the red in May, official figures showed yesterday, dashing hopes of a "Baghdad bounce" for manufacturers.

The office for national statistics said car production and hi-tech engineering led the 0.2% decline in manufacturing output in May, which erased some of April's increase and left factories producing 2.1% less than they were a year ago.

The evidence that weak global demand has left manufacturers struggling to come back from the economic downturn could strengthen the case for an interest rate cut when the Bank of England's monetary policy committee meets tomorrow and Thursday.

The MPC is being pressured by business leaders and unions to lower borrowing costs. Analysts are betting on a cut either this week or at the next rate-setting meeting in August, when the Bank will have produced its latest set of forecasts for growth and inflation.

"We still believe that the MPC will keep rates on hold this month but it is likely to be a close call," said John Butler, chief UK economist at HSBC, who expects interest rates to drop to 2.75% from their current 48-year low of 3.75% by the middle of next year.

With statisticians describing output from the manufacturing sector since last autumn as "relatively flat" and, estimating the current trend at a 0.5% annual decline, some economists were warning yesterday that lowering rates might still fail to kick-start a recovery.

"We are unconvinced that a quarter-point will make very much difference to manufacturers," said Simon Rubinsohn of City brokers Gerrard. "A global recovery is the very least that is required to bolster the fortunes of the industrial part of the British economy. The jury is still out on whether this will materialise during the second half of the year."

May's manufacturing downturn was widespread, the ONS said, with six of the 13 sub-sectors reporting falling production. Overall industrial output, which includes energy extraction and supply, rose 0.1% in May.

Despite the fall in manufacturing output, economic thinktank the National Institute for Economic and Social Research forecast yesterday that GDP growth would bounce back to 0.4% in the second quarter of 2003. In the first three months of the year it was 0.1%, when the prospect of war in Iraq knocked business and consumer confidence.

Martin Weale, NIESR's director, described the forecast as "a welcome revival" from the anaemic economic expansion earlier in the year. He stressed that it would still represent a below-par performance and "there remains a case for a precautionary reduction in interest rates".

Over the last three months the most significant cutbacks in production were in the metals industry, where output was down by 2%.

There was no sign of a revival in the closely watched hi-tech sector, which plunged into recession after the dotcom bubble burst. Output was down by 1.3% over the three months to May, despite hopes that a small rise in April marked the beginning of a recovery. Computer production fell by 4.8% in May alone.