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U.K. Industrial Output Plunges Most in Almost a Year: Economy

U.K. Industrial Production Unexpectedly Falls Most Since 2012
While the International Monetary Fund yesterday raised its forecasts for the U.K. by more than any other Group of Seven economy, today’s figures suggest the industrial sector is lagging behind. Photographer: Chris Ratcliffe/Bloomberg

U.K. industrial production unexpectedly fell the most in almost a year in August, casting doubt on the strength of the recovery.

Output dropped 1.1 percent from July, when it gained 0.1 percent, the Office for National Statistics said today in London. The median forecast of 30 economists in a Bloomberg News survey was for an increase of 0.4 percent. Factory production fell 1.2 percent, while a separate report showed the trade gap widened in the three months through August.

While the International Monetary Fund raised its forecasts for the U.K. by more than for any other Group of Seven economy yesterday and purchasing manager surveys suggest a pickup in gross domestic product growth in the third quarter, today’s figures suggest the industrial sector is lagging behind. Bank of England officials will probably maintain policy to cement the recovery when they conclude their two-day meeting today.

“August’s weak industrial production and trade figures signal that GDP growth in the third quarter might not be quite as strong as the business surveys have suggested,” said Samuel Tombs, an economist at Capital Economics Ltd. in London. The data “dampen hopes both that the recovery is gaining much more pace and that the economy is finally rebalancing.”

The pound extended its decline against the dollar after the data were published, and traded at $1.5980 as of 11:52 a.m. London time, down 0.7 percent from yesterday. The benchmark 10-year gilt yield was down 3 basis points at 2.66 percent.

North Sea

Six out of 13 manufacturing sectors declined in August, led by pharmaceuticals, computer electronics and food and beverage output, the ONS said. From a year earlier, factory output fell 0.2 percent.

There were also declines in the output of utilities including water, oil and gas and mining and quarrying, the ONS said. The drop in overall industrial output was the biggest since September last year. Oil and gas extraction fell largely because of maintenance shutdowns in the North Sea.

Industrial production grew 1.1 percent in the three months through August, the strongest in more than three years. The ONS cautioned against reading too much into a single month’s decline, noting that output also fell in the same month of 2011 and 2012.

“A disappointing set of hard data poses downside risks to our forecast for 0.9 percent growth in the third quarter but does not derail the story of a gradual and building recovery,” said Rob Wood, an economist at Berenberg Bank in London.

David Tinsley, an economist at BNP Paribas SA, said the data, while weak, must be seen in perspective, noting the quarterly increase and monthly volatility during the summer.

IMF Outlook

In its World Economic Outlook published yesterday, the IMF predicted U.K. economic growth of 1.4 percent in 2013 and 1.9 percent next year, about half a percentage point more in both years than previously seen.

Still the risks to the recovery were highlighted by its forecast that the euro region, the biggest market for British exports, will shrink 0.4 percent in 2013, lagging behind the U.S. for a fifth year.

The ONS said in a separate release that Britain’s goods-trade deficit narrowed to 9.63 billion pounds ($15.4 billion) in August from 9.94 billion pounds. Exports rose 1.1 percent as a 5.8 percent jump in shipments to countries outside of the European Union offset a 3 percent drop in sales to the EU. Imports declined 0.1 percent.

Between June and August, the deficit in goods and services widened to 8.39 billion pounds from 6.42 billion pounds, suggesting net trade will again struggle to contribute to growth in the third quarter. While GDP rose 0.7 percent in the second quarter, there was no contribution from trade and business investment acted as a drag.

German Output

Within the euro area, the recovery is being led by Germany, the region’s largest economy. Data today showed German industrial production rose 1.4 percent in August,rebounding from a 1.1 percent drop in July.

Elsewhere, Australian consumer confidence slipped in October, a private report showed. In the U.S., President Barack Obama will nominate Federal Reserve Vice Chairman Janet Yellen to head the central bank, a White House official said in an e-mailed statement.

The BOE said in a report today that U.K. banks boosted mortgage availability in the third quarter. Demand for mortgages also rose and spreads on loan rates “narrowed significantly,” the central bank said.

The BOE will leave its key interest rate at a record-low 0.5 percent this week and keep its bond-purchase plan on hold, according to two surveys of economists. The central bank, which will announce the decisions at noon tomorrow, has said it will keep the benchmark rate unchanged until unemployment, currently at 7.7 percent, falls below 7 percent.

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