UK industrial output falls by 1.1% on the month, in the biggest drop since September 2012, after rising by 0.1% in July
Optimistic growth forecasts for the second half of the year have taken a knock after official figures showed industrial output suffered an unexpected fall in August.
British industrial output fell by 1.1% on July, the biggest drop since September 2012, as factories cut production. August’s fall in industrial output was driven by a steep decline in manufacturing output, which fell 1.2% on the month. Firms in the basic pharmaceuticals, electronics and food and beverages sectors led the decline.
Many economists have pencilled in strong GDP growth this year following a string of positive surveys from across the economy, especially in the last six months. Surveys of manufacturing and construction businesses have shown output and orders on the rise while the services sector has expanded month on month since last autumn.
August’s Markit/CIPS purchasing managers’ index showed the fastest increase in manufacturing activity for two years, and a quarterly poll by the British Chambers of Commerce showed factories’ sales rising at the fastest rate since the early 1990s.
The National Institute of Economic & Social Research (NIESR) said in upbeat report that the latest manufacturing figures would only dent the rise in GDP in the three months ending in September, which it estimates was 0.8% higher than the previous quarter.
Chris Williamson, chief UK economist at financial data provider Markit, said the latest figures were a blip.
“A surprise fall in industrial production in August is likely to have been a temporary blip in an otherwise strengthening manufacturing economy. The underlying trend in production growth is in fact still the strongest since mid-2010, and we expect a continual improvement in coming months,” he said.
However, the Markit survey for September showed factory output growth slowed and seen in conjunction with the Office for National Statistics data for August, suggests the recovery is going to be bumpier than expected.
The UK’s failure to achieve the chancellor’s aim of generating an export-led recovery has also held back growth. In August the deficit in the trade in goods narrowed slightly, to £9.6bn, but the fall from the July figure of £9.9bn was modest and is not far off the record deficit of £10.3bn in April 2012.
David Tinsley, UK economist at BNP Paribas, said: “The big picture on the trade position in the UK is that the overall nominal trade balance is proving very hard to reduce. It is not obviously getting worse in a trend sense, and with some nominal GDP growth could start to look more convincingly better in relation to the size of the economy. But this adjustment is very slow.”
Scott Corfe, managing economist at the Centre for Economics and Business Research (CEBR), said a rise in imports could add to Britain’s woes and hold back a trade-led recovery.
“A challenge for the UK economy going forward will be to deliver a much-talked-about trade-led recovery. Export growth alone isn’t sufficient as trade-led expansion requires relatively controlled import growth – something the UK has found hard to accomplish in recent decades.
“Confidence in the economy has risen sharply since the start of 2013 and this looks set to translate into relatively robust growth in consumer spending and business investment next year. his is likely to feed through into higher import growth, making it that much harder for the UK to narrow its trade balance going forward.”
A key element of the export-led recovery, according to the Treasury, is the growth of the manufacturing sector. The chancellor said in 2011 that he wanted a “march of the makers” to rebalance the economy away from the financial and property sectors to manufacturing.
Rob Wood at Berenberg Bank pointed out that the manufacturing output trend remains expansionary over the last three months with output up 1.2%, the biggest rise since October 2010, but that the dip in August is cautionary for those analysts who believe a solid recovery is in place.
“The disappointing trade deficit and industrial data do emphasise that Britain has not yet reached the nirvana of well balanced growth. This is at heart a consumer led recovery, driven by low interest rates and households saving less and spending more. We expect it to broaden out and move onto a more sustainable footing next year,” he said.
The ONS said there was no specific reason for the decline in manufacturing, but noted that output in August tended to be weak and that seasonal adjustment to offset this was complicated by the London Olympics in August last year.
Output from Britain’s oil and gas industry, which also feeds into the broader industrial output measure, was weak too. Production dropped by 0.1% on the month and is 17.0% lower than a year earlier, the biggest drop since March.
Sterling fell against the dollar and the euro while gilt futures extended gains on Wednesday after British industrial output suffered a surprising drop in August while the goods trade deficit was bigger than expected.
The pound fell nearly 1% to $1.5923, down from $1.6035 before the data was released.
The euro rose 0.3% to a session high of 84.67p after the data was released from 84.35p beforehand.