Manufacturing stagnates as retail sales continue to rise

Britain's manufacturing industry remains stuck in the doldrums while appetite for consumer goods remains undiminished, figures showed today.

In further evidence of Britain's two-speed economy, the office for national statistics (ONS) said retail sales rose 0.6% in August compared to the previous month, exceeding forecasts of 0.4%. High street sales have remained persistently high in the past two years, helping to keep Britain's economy expanding despite slow growth globally.

British shoppers spent an average of £4.2bn every week in August according to ONS - 3.1% more than they did one year earlier. While the latest retail sales numbers vindicate the Bank of England's decision earlier this month to leave rates at 4%, they would appear to rule out a move to lower the cost of borrowing this year.

Bank minutes released yesterday said that its monetary policy committee stood ready to cut rates in case the economy lost steam. Rates have stood at 4%, a 38-year low, since November last year. The Bank started reducing rates in early 2001 in anticipation of a global downturn, fuelling a boom in consumer sales and in house prices.

Data from the Council of Mortgage Lenders (CML) for August has shown that lending reached £19.5bn, the third highest level on record. The CML said it expected borrowing to remain strong for the rest of the year and forecasts that total lending for the year will reach £210bn - a 31% rise on the previous year's figure - before slowing down next year.

Chief economist Philip Shaw of Investec said: "Barring a global calamity, a rate cut in October is now looking unlikely but the debate remains finely poised in terms of an easing later in the year."

Manufacturers would dearly like a cut in rates as they struggle to shrug off the worst factory slump in a decade. The CBI's industrial trends survey found order books at a six-month low as tough trading conditions and rising oil prices hit demand.

The CBI study reported that 40% of manufacturers said total orders were below normal, while 11% said they were above. The balance of minus 29% compares with minus 24% in August. Falling demand and rising stock levels have also caused manufacturers to scale back their output projections for the next four months.

"Domestic demand has faltered and modest expectations of short-term recovery have been cut back for the second time this year," Ian McCafferty, CBI chief economic adviser, said. There were glimmerings early in the year that manufacturing was on the mend but the recovery was now stuttering, he added.