British Manufacturing Decline Casts Doubt on Recovery: Economy

U.K. manufacturing unexpectedly shrank in May amid a drop in pharmaceuticals and metals output, casting doubts on the strength of the economic recovery in the second quarter.

Factory output fell 0.8 percent from April, when it declined 0.2 percent, the Office for National Statistics said today in London. The median forecast of 25 economists in a Bloomberg News survey was a 0.4 percent increase. Total industrial production was unchanged, thanks to an increase in oil and gas production. Separate data showed the goods-trade gap was little changed at 8.5 billion pounds ($12.6 billion).

The data suggest a broad-based recovery indicated by business surveys last week is struggling to take hold, with industrial production rising just 0.2 percent in the latest three months. Markit Economics said its factory, services and construction surveys point to second-quarter growth of at least 0.5 percent, and a revival in consumer spending has prompted banks including JPMorgan Chase & Co. to raise U.K. forecasts.

It’s “something of a disappointment given the upbeat tone of the surveys and indicate that the overall recovery is still largely dependent on the services sector,” said Samuel Tombs, an economist at Capital Economics Ltd. in London. “Both industry and trade seem unlikely to make much of a contribution to growth in the second quarter. Thankfully, the rest of the economy seems to be picking up for now.”

The pound fell against the dollar after the data. It traded at $1.4822 as of 3:46 p.m. London time, down 0.9 percent from yesterday. The yield on the 10-year U.K. government bond dropped 5 basis points to 2.44 percent.

Trade Deficit

The trade data showed that exports rose 1.5 percent in May and imports climbed 1.3 percent. An improvement in the deficit with European Union nations offset a deterioration in trade with the rest of the world.

Oil exports rose 27.2 percent on the month, the biggest increase since Sept. 2002, the statistics office said. Excluding oil, exports fell 1.8 percent.

The surplus on services narrowed to 6.1 billion pounds, leaving the overall deficit at 2.4 billion pounds compared with 2.1 billion pounds in April. That suggests net trade will struggle to make a contribution to growth in the second quarter.

A buoyant service sector led the National Institute of Economic and Social Research to say growth accelerated to 0.6 percent in the second quarter from 0.3 percent in the first, in an estimate published today. The International Monetary Fund, while scaling back its global projections, raised its 2013 growth forecast for the U.K. to 0.9 percent from 0.6 percent. The Washington-based group maintained its 2014 growth forecast at 1.5 percent.

Housing Pickup

There was also a more upbeat report from the Royal Institution of Chartered Surveyors, which said its U.K. house-price gauge rose in June as government measures pushed property demand to the highest in almost four years.

The index increased to 21, the highest since January 2010, from 5 in May. A positive number means more respondents saw values increase rather than decline. A measure of new buyer enquiries rose to 38, the highest since August 2009, from 30.

The British Retail Consortium said like-for-like retail sales rose 1.4 percent in June from a year earlier, while total sales increased 2.9 percent. Separately, a report from Deloitte showed companies are more optimistic about investment. In a survey of chief financial officers at some of Britain’s largest firms, 45 percent said it’s a good time to take on risk to balance sheets. Expectations for hiring and investment have risen to a two-year high, according to Deloitte.

Forward Guidance

Bank of England policy makers made an early start last week on providing forward guidance. At Mark Carney’s first meeting as governor, officials voted for no change to policy and released a statement cautioning that a pickup in rate-increase expectations isn’t warranted.

The BOE held its bond-purchase program at 375 billion pounds and its key interest rate at a record low 0.5 percent at its July 4 meeting.

The increase in industrial production in the three months through May was the weakest since January. From a year earlier, output fell 2.3 percent in May and manufacturing declined 2.9 percent, reflecting an extra working day last year as an annual public holiday was shifted to June to coincide with Queen Elizabeth II’s Diamond Jubilee celebrations.

Six manufacturing sectors fell in May from April and seven rose, the ONS said. The overall drop was led by pharmaceutical and metals. This was partly offset by higher output of food and drink, reflecting warmer weather.

Overall industrial production was aided by a 4.9 percent increase in output of crude oil and gas and a 3.6 percent gain in water supply. Output at utilities fell 1.7 percent.

“While the U.K. is making some progress” on rebalancing, trade is “one of the more stubborn areas where there is little improvement,” said David Tinsley, an economist at BNP Paribas SA in London. “The momentum behind manufacturing remains disappointingly weak, which is troubling given the economy needs to do more to do more to rebalance towards sectors where it can hope to find demand for its exports.”

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