Britain’s industrial sector bounced back to growth in March, helped by a resurgence in oil and gas production and steadily improving factory output.

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The healthy figures will cheer George Osborne in the wake of the Conservative election victory after a run of lacklustre data showed the economy slowing sharply in the first three months of the year.

The rise in oil production was the largest since March 2014 and analysts hoped this marked a bottoming out for an industry badly hit by last year’s oil price fall.

Investors reacted by pushing the pound higher, but the stock market reeled at the news, sending the FTSE 100 tumbling by more than 140 points, or 2% before it settled at 6933, down 1.4% or 96 points.

Stock markets have recovered strongly over the past year as the prospect of interest rate rises receded until later this year in the US and next year in the UK.

Analysts explained that the better than expected industrial figures would put pressure on the Bank of England to bring forward its first base rate rise, from 2016 to as early as November.

The likelihood of higher rates will persuade some investors to move away from equity markets in favour of bond markets, which are considered safer, but have have offered poor returns in recent years while interest rates have remained low.

The Bank’s governor, Mark Carney, is expected to warn investors at the presentation of his quarterly inflation report on Wednesday that the economy remains strong and it would be complacent to rule out an earlier rate rise.

The National Institute of Economic and Social Research reported that its monthly growth forecast had risen to 0.4% for the three months to April from 0.3% in the first three months of the year.

Marking a turnaround from falling GDP growth before and after Christmas, the institute said it remained upbeat about the prospects for growth. It said: “We expect the slight softening of GDP growth experienced in the first quarter of this year to be temporary and forecast the UK economy will expand by 2.5% for the year as a whole.”

The Office for National Statistics found that industrial production rose 0.5% in March on the previous month as mining and quarrying climbed 2.6%, while oil and gas output increased by 4.9% and contributed 0.5 percentage points to total production.

Manufacturing output also gathered strength following a surge in pharmaceutical output to record growth of 0.4% on the previous month.

Howard Archer, the chief economist at IHS Global Insight, said political uncertainty had evaporated since the election. He said: “The prospects for manufacturers seem pretty healthy on the domestic demand front, especially for consumer goods.

“Meanwhile, the underlying fundamentals for business investment still seem decent overall, which will hopefully support demand for capital goods, especially now that the risk of political uncertainty and instability has essentially disappeared for the time being following the Conservative’s gaining of a majority in the general election.”

Chris Williamson, the chief economist at financial data provider Markit, was more concerned to emphasise the continuing weakness of the recovery.

He said: “The overall picture in fact remains one of a manufacturing economy that is struggling to expand in the face of the stronger pound and heightened business uncertainty.

“The near stagnation of the sector over the first quarter is a reminder of how little progress the UK has made in terms of rebalancing towards manufacturing and will probably do little to persuade the Bank of England that the economy is ready for higher interest rates.”

After a surge in growth across the manufacturing sector in 2013 and the first half of 2014, factory output has slowed, adding just 1.1% over the past year.

Osborne plans to strengthen efforts to rebalance the economy in favour of industrial activity and the government took a step in that direction with the by naming the Tory rising star James Wharton as the “northern powerhouse” minister.

The appointment of the Stockton South MP was welcomed by the vice-chancellor of Sheffield University, Sir Keith Burnett, who said: “George Osborne has promised investment in major infrastructure projects and innovation. The northern powerhouse will see a resurgence of the UK not only as a crucible for financial services and creative industries, but a country that makes essential parts for export. Equity markets alone can no longer support the route from innovation to product.”

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