Bloomberg News

U.K. May Manufacturing Rises on Computers, Chemicals

July 06, 2006

U.K. factory production rose in May, led by makers of computer equipment and chemicals, suggesting growth in Europe's second-biggest economy is accelerating.

Manufacturing rose 0.5 percent from April, when it dropped a revised 0.3 percent, the Office for National Statistics said today in London. Economists expected a 0.3 percent gain, the median of 31 estimates in a Bloomberg News survey showed.

The report, together with June surveys, signal that factories may help quicken growth in the $2 trillion economy from 0.7 percent in the first quarter, as the Bank of England predicts. The bank, which kept its interest rate at 4.5 percent today, forecasts manufacturing exports and consumer spending will help economic growth accelerate this year.

``It's a very healthy acceleration,'' said Lena Komileva, an economist at Tullett Prebon in London. ``From a policy perspective, it supports the dominant sentiment that the next move in interest rates will be up.''

Investors are betting on higher borrowing costs this year, futures trading shows. The yield on the three-month contract maturing in December was 4.94 percent at 12:15 p.m. in London. The contract settles to the three-month London interbank offered rate for the pound, which has averaged about 15 basis points more than the central bank's target for the past decade.

Nine of thirteen manufacturing industries increased production and four decreased output, the statistics office said.

Electricals, Chemicals

Growth in manufacturing was led by a 2.1 percent gain in electrical and optical goods production, including computer equipment, and a 1.6 percent increase in output of chemicals and manmade fibres. There were no significant declines.

Overall industrial production, which also includes utilities, mining and oil and gas industries, rose 0.3 percent, rebounding from a 0.6 percent drop in April.

Oil and gas extraction fell 0.3 percent in the month and 11.9 percent in the year. ``There was a normal rate of decline in oil as supplies run out and an extra fall in gas because of a fire at a storage facility, prompting operators to keep the gas underground,'' the statistician said.

Surveys suggest a manufacturing pickup persisted in June. Factory production grew at the fastest pace in almost two years, the Chartered Institute of Purchasing & Supply and the Royal Bank of Scotland said July 3. An index of factory orders held near the highest in more than a year, the Confederation of British Industry said June 22.

Improving Outlook

Faster European growth and company reports also suggest the outlook for manufacturers is improving. The European Central Bank forecasts the dozen nations sharing the euro will expand about 2.1 percent this year, up from 1.7 percent in 2005.

Cookson Group Plc, the world's biggest maker of molds for the steel industry, said June 30 that its first-half earnings rose at least 23 percent, helped by orders from China and India and cost savings such as job cuts.

U.K. companies' staff reductions have helped them weather a 24 percent increase in oil prices in the past year and push their profitability to a record in 2005, the government said July 4. Job cuts by manufacturers shrank the industrial workforce to a record low of 3.05 million in the three months through April.

Workforce reductions have also swelled unemployment. Total claims for jobless benefit rose in May to the highest level in four years and helped to curb consumer demand. Household spending growth slowed in the first quarter to 0.3 percent, down from a 0.8 percent gain in the final three months of 2005.

BOE Forecasts

The Bank of England predicts consumer spending will pick up again to be ``a little'' below its long-run average, which it measures at 0.7 percent per quarter, helping to underpin expansion this year of about 2.6 percent, up from a 13-year low of 1.9 percent in 2005.

The central bank's rate-setting panel kept its rate unchanged today for an 11th month, as forecast by all 40 economists in a Bloomberg News survey. The bank will release minutes on July 19 showing how its seven policy makers voted.

To contact the reporter on this story: Craig Stirling in London at cstirling1@bloomberg.net.

To contact the editor responsible for this story: Riad Hamade at rhamade@bloomberg.net.


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