The British economy is continuing to get into better balance, with manufacturers in robust mood and consumer spending slowing to a more sustainable level. But the Bank of England‘s monetary policy committee needed more convincing signs of a strengthening recovery when it decided at its May meeting to leave interest rates on hold.

Certainly there is room for some apprehension over the nation’s economic health. GDP grew by only 0.1% in the first quarter – much less than expected and following zero growth in the last quarter of 2001. Now, official estimates indicate a

surprise fall in manufacturing output in March, after only two months of modest growth, although most sectors of the timber industry increased output.

But the gloom should not be over-emphasised. The industrial sector began the second quarter in good shape. Purchasing managers report that manufacturing activity continued to rise in April, and is gaining momentum. Export orders rose at their fastest monthly rate for nine years, with the US recovery acting as a catalyst to growth in much of Europe.

The survey bears out the sharp increase in optimism among manufacturers reported earlier by the CBI. This was the first improvement recorded in more than two years and reflects expectations of a growth in orders from domestic and export markets.

Scottish manufacturers reported the biggest rise in orders during April and the third successive monthly increase in output. The Bank of Scotland‘s business survey also reveals a rise in service sector activity for the sixth month in a row.

The recovery in manufacturing and services will take the pressure off consumers, who have kept the economy afloat for more than a year. Nonetheless, retail sales remained strong during March and April. According to Alastair Eperon, the CBI retail spokesperson, ‘The underlying increase in April retail sales slowed slightly from the levels reached last autumn, and retailers expect a more modest pace of growth to return in the months ahead.’

The British Retail Consortium says that the three-month trend rate of annual sales growth fell from 9.1% in March, to 7.6% in April. The consortium adds that big-ticket furniture items have started to pick up again after slowing in the past couple of months. Data from the CBI suggest that 53% of furniture retailers saw annual sales growth during April, compared with only 3% the previous month. Hardware and DIY outlets saw even stronger April business, with sales up for 64% of survey respondents.

Expectations of a slowdown in consumer spending are supported by fresh evidence from the CBI databank of a slide in pay awards. This suggests that settlements in manufacturing were at a record low of 2.3% in the first quarter of the year. In services, average settlements dropped to 3.3%, from 3.9% in the fourth quarter of 2001, to the lowest level for the time of year since 1995.

As well as taking some of the strength out of consumers’ buying power, the falling rate of pay increases provides added testimony to the absence of inflationary pressures in the economy. Manufacturers’ raw material and fuel costs fell by 3.6% in the year to April, while overall factory gate prices rose by just 0.2%. The wood and wood product industry’s input costs rose by an annual 0.4% but output prices were at the same level as April 2001.

However, the average cost of construction materials rose in April at its sharpest rate since October 2000, according to a survey by the Chartered Institute of Purchasing and Supply. And as construction activity rose at its fastest pace for nearly a year, the institute reports a further lengthening in suppliers’ delivery times.

Official estimates indicate that the total intake of new orders for construction rose in value by over 23% in the first quarter of 2002. A massive 123% increase in infra-structure projects contributed to this buoyant picture, but the housing sector also saw a strong increase in new orders placed with contractors.