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UK factory output dips in May, stuns experts

Explanation sought in ‘seasonal influences’ and British business lobby says this is enough reason to keep interest rates low, reports Team IFM London, July 11, 2014: Economists and analysts were left groping for an explanation as the UK, said to have reached pre-meltdown growth levels by May-end and forecast to dethrone France as the fifth largest economy by 2020, saw its manufacturing output tumble unexpectedly...

Explanation sought in ‘seasonal influences’ and British business lobby says this is enough reason to keep interest rates low, reports Team IFM

London, July 11, 2014: Economists and analysts were left groping for an explanation as the UK, said to have reached pre-meltdown growth levels by May-end and forecast to dethrone France as the fifth largest economy by 2020, saw its manufacturing output tumble unexpectedly in May, even as an independent survey said the sectoral performance in June will round off a “robust” second quarter.

While manufacturing sector data and surveys so far this year have indicated that the sector is growing at a fast clip, UK’s Office for National Statistics (ONS) on Tuesday said total industrial production decreased by 0.7 percent in May as compared to the preceding month.

“Manufacturing was the largest contributor, decreasing by 1.3 percent,” said ONS, a non-ministerial data office reporting directly to the British parliament, catching analysts such as David Tinsley, UK economist at BNP Paribas, off guard.

While The Wall Street Journal described the development as an “industrial puzzle”, the finding came across as a “heavy dose of reality” for BNP’s Tinsley following a series of buoyant economic data in recent months, reported broadcaster BBC.

“It is quite possible that the fall today reflects some erratic, seasonal influences,” BBC quoted Tinsley as saying. “It is noteworthy that German industrial production was similarly surprisingly weak yesterday (Monday). It could be production plans were affected by the relative lateness of Easter,” he added.

According to David Kern, chief economist at the British Chambers of Commerce, “although the recovery is continuing, the pace has slowed”. According to this influential business lobby, the latest data strengthened the case for interest rates to remain low.

“Despite the progress made over the past year, manufacturing output is still more than 7 percent below pre-recession levels – in contrast to services, which are more than 2 percent higher,” Kern said in a statement soon after release of the latest ONS industrial performance data.

On June 10, the National Institute of Economic and Social Research (NIESR) – the country’s longest established independent economic research institute – had said UK’s GDP growth surpassed its pre-recession peak and its economy is set to grow by 2.9 percent this year.

But late last month, ONS said the economy grew by 0.8 percent between January and March, in line with its previous estimate, while households’ real disposable income fell by 0.2 percent between the fourth quarter of 2013 and the first this year.

However, in a survey report released on July 1, economy tracker Markit said “strong growth of output [and] new orders and jobs in June” rounded off a “robust” second quarter for the UK’s manufacturing sector.

“UK manufacturing continued to flourish in June, rounding off one of the best quarters for the sector over the past two decades,” noted Rob Dobson, senior economist at Markit.

SHOCK NOTE

Despite Markit’s note of optimism, the latest ONS data comes as a reality check, with total industrial production decreasing by 0.7 percent between April and May this year, dragged down primarily by the sluggish manufacturing sector.

The factory output fall, the largest at 1.3 percent, was accounted for by the decrease in production in three areas – basic metals and metal products; basic pharmaceutical products and pharmaceutical preparations, and computer, electronic and optical products.

These sectors were the “main contributors” to the overall slump in manufacturing output, ONS said in a release that had incorporated revised data from April.

Tuesday’s data showed that in the three months to May, production was 11.3 percent and manufacturing 7.2 percent below their figures reached in the pre-downturn GDP peak in the first quarter of 2008.

However, the ONS data painted a healthier year-on-year picture for production output during the month under review, saying it increased by 2.3 percent between May 2013 and May 2014.

“There were increases in two of the main sectors, with manufacturing being the largest contributor, increasing by 3.7 percent,” ONS said. The output in the water supply, sewerage and waste management segments increased by 2.3 percent.

The data office said the principal manufacturing components contributing to the increase between May 2013 and May 2014 were rubber, plastic and other non-metallic mineral products; transport equipment, and food products, beverages and tobacco.

These nuggets of upbeat data did little to placate the corporate sector, with the influential British Chambers of Commerce saying the “disappointing” manufacturing figures strengthened the case for interest rates to remain low.

Kern, chief economist at the chambers, said he feared manufacturing exporters would now have to cope with a much stronger pound, making their products more expensive for overseas customers. “Exporters have so far shown resilience,” Kern said in a statement. “However, the situation could become serious if the sterling strengthens further.”

The economist said this reinforced the arguments for the central bank to delay increases in interest rates until it becomes absolutely necessary.

“The recovery must be given time to consolidate and gather more momentum,” Kern said. “The risks to the economy of premature increases in rates are much greater than the risks of waiting a little longer.”

UPBEAT JUNE

However, according to independent economy tracker Markit, order inflows at factories strengthened in June on the back of improved demand in both domestic and export markets, leading to job creation – propelled by rising SME headcounts – hitting a 39-month high.

“With levels of production surging higher, and order books swollen by a further upswing in demand from both domestic and overseas clients, job creation accelerated to its highest for over three years,” said Markit’s senior economist Dobson.

A Markit manufacturing survey, undertaken on behalf the Chartered Institute of Purchasing and Supply (CIPS), saw the PMI reach 57.5 points in June, up from 57 in May, signaling an expansion throughout the past 16 months.

Moreover, the headline seasonally adjusted PMI – a gauge of UK’s manufacturing performance – was its second-highest reading in 40 months, bettered only during this period by last November’s 57.8, a statement from Markit said.

“Furthermore, the average index reading during the second quarter is the highest since Q1 2011,” it added.

Manufacturing output increased for the 16th successive month in June. Although the rate of growth eased to a three-month low, it stayed elevated and sufficient to ensure the average pace over the second quarter as a whole was the strongest for 20 years.

The latest survey saw robust production growth maintained across the consumer, intermediate and investment goods sectors, Markit said.

The level of incoming new business rose at the fastest pace since November 2013 and to one of the greatest extents since the survey began in 1992. The domestic market remained the prime source of new contracts, although inflows of new export business also strengthened.

UK manufacturers reported growth in new work received from clients in Europe, Asia and the Middle East.

“Over the second quarter, firms have enjoyed their best spell of output growth for 20 years, and in response have been able to boost employment even further this month,” said David Noble, group chief executive officer at CIPS.

“A rise in the number of jobs was seen across all sectors as well as across both SMEs and large companies, adding to signs that the economic recovery is broadening,” Noble added.

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