UK Manufacturing & trade data deal blow to growth hopes

Sep 10, 2015

Manufacturers have been warning for months that they were struggling against the strength of sterling and sluggish demand in their main export markets, but even so, the official figures were worse than many economists had expected.

The sector accounts for only about 10 per cent of the UK’s overall economy, but the drop follows signs of softer activity in the dominant services sector.

The National Institute of Economic and Social Research said that it estimated overall economic growth had slowed to 0.5 per cent in the three months to August, well below the average 0.7 per cent quarter-on-quarter rate since the start of 2013.

Few City analysts are formally downgrading their forecasts, as signals from the domestic economy remain strong, but the mood on the third quarter is increasingly cautious.

Sam Hill, senior UK economist at RBC Capital Markets, said the service sector would have to do “a lot of heavy lifting” if overall growth was to be maintained at 0.7 per cent and George Buckley, chief UK economist at Deutsche Bank, said strong third-quarter growth was now “more tricky to achieve”.

Sterling fell against the dollar and the euro as traders bet the weaker data would add to caution at the Bank of England. Forecasters are expecting the committee to remain split 8:1 in favour of keeping rates on hold when the latest minutes are released on Thursday.

Liz Martins, UK economist at HSBC, said the “double whammy of weak data releases may be the final nail in the coffin” for any policymaker thinking of changing their mind and voting for a rate rise.

Manufacturing output decreased by 0.5 per cent in July compared with the previous year, the first outright fall in manufacturing output in two years, and by 0.8 per cent compared with June.

“Once again, talk of rebalancing in the UK economy has proven premature,” Ms Martins added.

Joe Grice, chief economist at the Office for National Statistics, said the “biggest single factor” in the fall in manufacturing output was in the car industry, with the summer shutdowns appearing to start earlier than usual and companies reporting falling exports.

With eurozone recovery remaining weak, and continued uncertainty about the depth of the slowdown in China, Britain’s factories are braced for a bleak autumn.

Industry body the EEF this week slashed its growth forecasts for the year, warning that the “white-knuckle ride [of global risks] is starting to take its toll”.

Separate trade data showed that exports of goods fell by £2.3bn to £22.8bn, the lowest figure since September 2010. Britain continues to run a big surplus on trade in services, but this was not sufficient to make up for the weakness in goods, with the overall trade deficit widening to £3.4bn in July.

Michael Saunders, head of west European economic research at Citi, noted that while monthly data were notoriously volatile, there had been a particularly sharp slide in exports to China.

Overall exports to emerging markets were down 18 per cent month on month — the fourth biggest drop in the last 10 years.

“This slide may be erratic . . . but also may be an early sign that the EM slowdown is hitting UK exports,” he said.

Source: Financial Times