U.K. Industrial Output Unexpectedly Falls on Oil, Gas

U.K. industrial production unexpectedly fell in January as factory output slumped, fueling concerns that Britain may slip into a triple-dip recession.

Production dropped 1.2 percent from December, when it jumped 1.1 percent, the Office for National Statistics said today in London. The median forecast in a Bloomberg News survey of 29 economists was for a 0.1 percent increase. Manufacturing declined 1.5 percent. The pound fell.

As manufacturers battle a continued slump in the euro area, the U.K.’s biggest trading partner, as well as lackluster demand at home, today’s data have fueled concern the economy will fall into its third recession in five years. The National Institute of Economic and Social Research estimated that the economy shrank 0.1 percent in the three months through February.

“A dire set of U.K. data,” said Ross Walker, an economist at Royal Bank of Scotland Group Plc in London. It leaves a “decline in first-quarter gross domestic product looking more likely than not. Sustainable recovery and macroeconomic rebalancing feel as distant as ever.”

The drop in manufacturing output compared with economists’ forecast for an unchanged reading. The statistics office said respondents to the survey didn’t cite heavy snowfalls that month for the slump. Nida Ali, economic adviser to the Ernst & Young ITEM Club, said it may partly reflect the impact of the “sharp” increase in December.

Pound Weakens

The pound dropped to as low as $1.4832 against the dollar, the weakest since June 2010, and was trading at $1.4868 as of 2:40 p.m. in London, down 0.3 percent on the day. Government bonds rose, pushing the 10-year gilt yield down five basis points to 1.96 percent.

“It is quite early in the flow of first-quarter data, but the data so far suggest that first-quarter growth may well be negative, or at best flat,” said Michael Saunders, an economist at Citigroup Inc. in London.

In its estimate of gross domestic product, NIESR said its figures suggest that the economy “continued to flatline in the first two months of this year.”

Today’s production data showed that mining and quarrying fell 2.4 percent in January from December, while electricity and gas rose 1.2 percent. Oil and gas dropped 4.3 percent because of the closing of the Schiehallion platform, operated by BP Plc. The ONS said the suspension will continue for four to five years as a new production and loading vessel is built. Oil and gas output also plunged in September and October 2012 when the Buzzard platform in the North Sea was temporarily shut.

BOE Remit

Bank of England policy makers held their bond-purchase program at 375 billion pounds ($558 billion) last week as officials debated more radical measures to revive growth. In February, policy makers said they “stand ready” to increase quantitative easing to support the recovery.

The U.K. economy shrank 0.3 percent in the fourth quarter and and the BOE has forecast that growth will remain weak in the near term.

With the incoming governor, Mark Carney, spurring a debate on the BOE’s remit, Chancellor of the Exchequer George Osborne has said he will consider the bank’s 2 percent inflation target in his budget this month as he does every year.

Carney, who replaces Mervyn King in July, met the U.K. Treasury’s top civil servant, Nicholas Macpherson, to discuss possible changes to Britain’s monetary policy making, said a person with knowledge of the talks. They discussed the options in Ottawa last week, according to the person, who declined to be identified because the conversation was private.

Currency Impact

Manufacturers may get some support this year from the weakness of the pound and a boost to export competitiveness. Sterling is the second-worst performer after the yen this year among 10 developed-market currencies, according to Bloomberg Correlation-Weighted Indexes. It’s fallen about 8 percent against the euro and 8.5 percent versus the dollar in that period.

Birmingham-based IMI Plc, a maker of fluid controls and retail store displays, has said that while the “global macro-economic outlook remains mixed,” it expects to benefit from growth in emerging markets this year.

In a separate report today, the ONS said the trade deficit on goods narrowed to 8.2 billion pounds in January from 8.74 billion pounds the previous month. Economists had forecast that the would widen to 8.95 billion pounds. Exports fell 3.5 percent and imports declined 4.2 percent. Imports of oil dropped by about 1 billion pounds, the most since August 2008, though the ONS said this data can be volatile.

The trade balance on services was at 5.83 billion pounds in January, leaving the total trade gap at 2.36 billion pounds.

House Prices

Also today, the Royal Institution of Chartered Surveyors said its index of U.K. house prices fell to minus 6 in February from minus 4 in January. While the value index declined, RICS said expectations for both sales and prices improved.

Elsewhere in Europe, Germany’s Bundesbank almost doubled its risk provisions in 2012, citing increased potential for losses stemming from European Central Bank monetary policy.

The Frankfurt-based central bank increased provisions for general risks by 6.7 billion euros ($8.7 billion) to 14.4 billion euros, it said today when releasing its 2012 annual report. Due to higher interest income, the Bundesbank’s profit rose to 664 million euros from 643 million euros in 2011. The increase in provisions stems from the ECB’s enhanced support of the financial sector over the course of the year, the Bundesbank said.

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