UK manufacturing fall casts doubt on growth prospects

British manufacturing output unexpectedly fell at its sharpest pace in seven months in October, putting pressure on finance minister Gordon Brown's new economic growth forecasts.
Manufacturing output fell 0.7 percent in October in the third straight monthly decline, official data showed on Tuesday, suggesting times are still tough for Britain's factories which only just climbed out a recession in the first half of 2005.
High energy prices and sluggish domestic demand have taken a heavy toll on the world's fourth largest economy this year, forcing Brown to slash in half his forecasts for 2005 growth in the annual pre-budget report on Monday.
Tuesday's news of further declines in manufacturing supported analysts' who say the Bank of England has similarly been too optimistic on growth and will be forced to cut interest rates again in 2006 to revive the economy.
"With consumer spending remaining subdued, we remain gloomy on the UK's near-term economic prospects and believe both the BoE's and Chancellor Brown's forecasts, even after yesterday's slashing of growth predictions, are still too optimistic," said James Knightley, economist, ING Financial Markets.
"Indeed, we continue to believe there is a strong case for further monetary policy easing in the New Year."
Interest rate futures rose on the factory data while the pound fell as traders bet on the prospects of more BoE borrowing cost cuts on top of this August's trim to 4.5 percent.
The central bank has been counting on a gradual recovery in consumer spending and a pick-up in exports following signs of economic recovery in the euro zone, a key market for British goods. But most economists doubt its wishes will be fulfilled.
"The fall in production has wider implications for our GDP forecasts," said David Page at Investec, who forecasts 1.7 percent growth in 2005, just below Brown's new 1.75 percent forecast.
"This puts us even more at odds with the BoE's rosy forecasts for 2.5 percent in 2006," Page added. "Our view remains unchanged in expecting a repo rate of 4.00 percent by June 2006."
WATCHING CHRISTMAS The wider industrial sector - which includes Britain's North Sea oil fields - also posted its sharpest contraction since March. Output fell by 1.0 percent on the month and by 1.8 percent on the year.
Within that, oil and gas output declined by 2.1 percent in October and the ONS attributed that to lower domestic demand for heating because of an unusually warm October.