MANUFACTURING recorded its strongest performance since 1994 creating hopes that an export-led recovery can help rebalance the economy.

The closely-watched Chartered Institute of Purchasing and Supply’s (CIPS) activity index, where a reading over 50 indicates growth, jumped to 58.3 in December, up from 57.5 in November, driven by strong orders from overseas.

However, with VAT rising from 17.5 per cent to 20 per cent, the sector delivered fresh warnings that more price rises are in the pipeline after input costs rose at their fastest in the 19-year history of the survey.

The steepest price rises were reported in the textiles, clothing, food, drink, chemicals and plastics sectors.

It is the 17th month in a row that the manufacturing index has remained above 50 and the 19th month that production rose.

The sector also created new jobs for the ninth consecutive month, only slightly down from November’s record rate of job creation, fuelling hopes that the manufacturing sector can make up for the job losses in the public sector caused by Government cutbacks.

Rob Dobson, senior economist at Markit and author of the survey, said: “The UK manufacturing sector saw a truly spectacular end to last year.

“The latest data is consistent with manufacturing production rising at a quarterly rate close to two per cent, which should generate a meaningful contribution from the sector to economic growth in the fourth quarter to offset likely weakness in other sectors.

“All of this points to manufacturing being a positive spur to economic recovery in the final quarter.”