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U.K. Manufacturing Drops in Sign of Fourth-Quarter Weakness

U.K. Manufacturing Drops More Than Forecast on Food, Alcohol
The slump was led by food and alcohol production, with the latter falling 9.1 percent, the most since May 2011. Photographer: Chris Ratcliffe/Bloomberg

U.K. manufacturing production fell more than economists forecast in October as food and alcohol slumped, indicating weakness in the economy at the start of the fourth quarter.

Factory output dropped 1.3 percent from September, the most in four months, the Office for National Statistics said today in London. The median forecast of 28 economists in a Bloomberg News survey was for a 0.2 percent decline. Total industrial output unexpectedly fell 0.8 percent, a third consecutive decrease, led by mining, oil and gas.

Manufacturers are under pressure as Europe’s sovereign debt crisis hurts demand in the U.K.’s biggest export market and a fiscal squeeze crimps sales at home. The Bank of England, which has said the economy may contract this quarter, left its bond-buying program on hold yesterday as it assesses the need for more stimulus after Chancellor of the Exchequer George Osborne extended his austerity program.

The data “raise the chances of a triple-dip recession in the wider economy,” said Samuel Tombs, an economist at Capital Economics Ltd. in London. “We continue to expect industrial production to fall further in 2013 as the euro zone’s recession deepens and high inflation holds back domestic consumer demand for manufactured goods.”

The pound remained lower against the dollar after the report, and was trading at $1.6035 as of 10:10 a.m. in London, down 0.1 percent on the day. The yield on the benchmark 10-year U.K. government bond was little changed at 1.74 percent.

Beer Slump

Out of 13 categories in manufacturing, 10 fell, two rose and one was unchanged in October, the statistics office said. The slump was led by food and alcohol production, with the latter falling 9.1 percent, the most since May 2011. The British Beer and Pub Association said 117 million fewer pints of beer were sold in October compared with a year earlier. Manufacturing of coke and refined petroleum declined almost 20 percent, a record drop.

The monthly drop in industrial output, which includes mining and quarrying and utilities, compared with the median forecast of 31 economists for a 0.8 percent increase. Oil and gas extraction fell 4.4 percent in October from September, partly due to the continued shutdown of the Buzzard platform, the largest in the North Sea.

‘Shockingly Bad’

David Tinsley, an economist at BNP Paribas SA in London, said the data were “shockingly bad.” While some of the decline may be due to “erratic” factors, such as an unwinding of food and alcohol sales after the London Olympics, “this is still very bad news at the start of the fourth quarter,” he said.

In a separate report today, the ONS said construction orders rose 5.4 percent in the third quarter from the previous three months. However, they were down 6.7 percent from a year earlier and at their third-lowest level on record.

While the U.K. economy emerged from a recession in the third quarter with growth of 1 percent, the recovery remains weak. Surveys this week showed manufacturing and construction shrank in November while services growth weakened.

Britain’s Office for Budget Responsibility cut its growth forecasts this week and said the economy has performed less strongly than it expected in March, “primarily reflecting the weakness of net exports.”

The Bank of England’s Monetary Policy Committee kept its quantitative-easing target at 375 billion pounds ($602 billion) yesterday. Still, policy makers have indicated the door is open to more purchases if needed.

In the euro area, the economy shrank 0.1 percent in the third quarter and manufacturing output contracted for a 16th month in November, adding to signs a recession may extend into next year. In Germany today, the Bundesbank cut its 2013 growth projection to 0.4 percent from the 1.6 percent predicted in June and said the economy, Europe’s largest, will grow 0.7 percent this year, down from its previous forecast of 1 percent.

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