U.K. Factories Boost Output Amid Signs of Economic Recovery

Photographer: Paul Thomas/Bloomberg

Factory output rose 0.2 percent from June, when it gained 2 percent, the Office for National Statistics said today in London. Close

Factory output rose 0.2 percent from June, when it gained 2 percent, the Office for... Read More

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Photographer: Paul Thomas/Bloomberg

Factory output rose 0.2 percent from June, when it gained 2 percent, the Office for National Statistics said today in London.

U.K. manufacturing production rose for a second month in July, adding to signs of an accelerating economy that has led investors to bet the Bank of England will increase interest rates earlier than it has projected.

Factory output rose 0.2 percent from June, when it gained 2 percent, the Office for National Statistics said today in London. The increase was in line with the median forecast of 23 estimates in a Bloomberg News survey. Industrial output was unchanged as warm weather reduced demand for energy. The trade deficit widened in July by more than economists predicted as exports to countries outside the European Union plunged.

The data follow business surveys this week showing services and construction at their strongest since the financial crisis last month and manufacturing at a 2 1/2 year high. The 10-year gilt yield climbed above 3 percent for the first time since 2011 yesterday as the Bank of England left policy unchanged without an explanatory statement.

“Today’s figures show that the industrial sector is still doing well, although the drop in exports is something of a concern,” said Samuel Tombs, an economist at Capital Economics Ltd. in London. “As a result, today’s trade figures could be an early warning that the economy cannot depend on the strong support that it received from net trade in the first half of the year for much longer.”

Weather Boost

Warm temperatures in July boosted demand for beverages as well as water to fill paddling pools and water gardens, the ONS said. At the same time, it damped demand for gas and electricity, with utilities output falling by 2.2 percent on the month.

The risks to the recovery were highlighted in a separate report showing Britain’s goods-trade deficit widened to 9.85 billion pounds in July, the most since October last year. Exports fell 7.6 percent, with shipments to nations outside the European Union plunging 16 percent. Overall imports declined 1 percent.

The drop in sales to non-EU nations was led by finished manufacturing, machinery and transport gear and aircraft, the ONS said. The drop in sales to non-EU nations was led by finished manufacturing, machinery and transport gear and aircraft, the ONS said. Exports to EU countries rose 1.3 percent on the month.

The pound erased gains against the dollar after the data were released and was trading at $1.5574 as of 10 a.m. London time, down 0.1 percent on the day. The 10-year gilt yield was down 2 basis points at 2.99 percent.

Market yields suggest investors think the Bank of England will have to raise interest rates before the end of 2016, as signaled by Governor Mark Carney when he introduced forward guidance on Aug. 7.

Rate Expectations

Carney got a boost today with a BOE report showing public expectations for a rate increase in the coming year fell to the lowest since the aftermath of the collapse of Lehman Brothers Holdings Inc. Twenty nine percent of people expect an increase, down from 34 percent in May, the BOE said in its quarterly Inflation Attitudes survey conducted by Gfk NOP Ltd. That’s the lowest since November 2008 and the fourth lowest since the survey began in 1999.

Under the new policy framework, policy makers won’t consider raising the benchmark interest rate from a record-low 0.5 percent until unemployment falls to 7 percent from its current rate of 7.8 percent. The pledge is subject to a so-called knockout if inflation expectations become dislodged.

The economy saw expansion across all sectors in the second quarter, and a 0.9 percent in industrial production in the three months through July may boost expectations investment will again contribute to growth in the third quarter.

Trade Doubts

The Organization for Economic Cooperation and Development lifted its 2013 U.K. growth forecast this week to 1.5 percent from 0.8 percent, with a 0.9 percent expansion in the current quarter.

The widening of the trade deficit, though, casts doubt on the contribution of net trade. Between May and July the overall deficit including services widened to 6.14 billion pounds from 5.84 billion pounds in the period through April.

In July, alone the total trade deficit widened to 3.09 billion pounds from 1.26 billion pounds the previous month as Britain recorded its smallest surplus in services since January.

To contact the reporter on this story: Scott Hamilton in London at shamilton8@bloomberg.net;

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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