By Andy Bruce
LONDON (Reuters) - British factories intend to increase investment at the strongest pace in four years, adding to signs that manufacturing will help support an otherwise sluggish economy in 2018, an industry survey showed on Monday.
Europe's fast-recovering economy has helped Britain's factory sector grow quickly at the end of 2017, according to the quarterly report from manufacturing association EEF and accountants BDO.
Other surveys in recent weeks have also shown a pickup in British manufacturing activity.
Still, the sector makes up only a tenth of overall British economic output and growth in the services sector -- which is roughly eight times as big -- has been patchier.
Higher inflation largely caused by the fall in the pound after last year's Brexit vote has pushed up costs for households and businesses this year, contributing to Britain's lagging economic performance compared with European peers.
The Confederation of British Industry on Monday predicted economic growth of around 1.5 percent this year will be repeated in 2018, describing Britain's performance as "steady but subdued".
That compares with its forecast for growth of 1.8 percent in the euro zone next year.
EEF took a slightly dimmer view of Britain's prospects for next year, expecting economic growth of 1.3 percent, but said manufacturing looked likely to outperform other sectors.
"Stronger global growth has cemented the foundations for growth in manufacturing this year, but the sector's contribution to the UK economy has been greater than most expected," EEF economist Lee Hopley said.
"There is some confidence that this momentum will carry into 2018, but as we head towards the Brexit end game we need manufacturing to produce the same trick of broad-based growth again next year."
Manufacturers' investment intentions rose to their highest since the second quarter of 2014, a good omen for Bank of England officials who expect business investment will improve next year.
But EEF said there was some evidence that much of the investment was to help cope with short-term demand, with Brexit uncertainty dampening plans for larger-scale projects.
Manufacturers expected a sharp increase in selling prices for both domestic and export goods over the next three months, in part reflecting a recent increase energy and commodity costs.
The CBI said it thought consumer price inflation had already peaked at 3 percent in October.
It pencilled three further BoE interest rate hikes by the end of 2019, starting with one in the third quarter of 2018 -- slightly earlier than the consensus of economists polled by Reuters.
The BoE raised rates last month for the first time in a decade.
"We expect domestic demand to remain soft. Household spending will remain under pressure from squeezed real wages and Brexit uncertainty will weigh on business investment," said Rain Newton-Smith, CBI chief economist.
(Reporting by Andy Bruce)