U.K. Manufacturing Unexpectedly Slumps Most in 16 Months

U.K. manufacturing unexpectedly slumped the most in 16 months in May, indicating the economy may have struggled to maintain momentum in the second quarter.

Factory output plunged 1.3 percent from April, the most since January 2013 and the first decline in six months, the Office for National Statistics said today in London. The median forecast of 25 economists in a Bloomberg News survey was for a gain of 0.4 percent. Industrial output fell 0.7 percent, the biggest drop since August 2013.

The British Chambers of Commerce warned today against a “hasty” move by the Bank of England to tighten policy, and said the strength of the pound is the “largest area of anxiety” for manufacturers. The ONS data may add weight to the case for policy makers to delay a rate increase.

The data “suggest that the stronger pound might be starting to slow the recovery in the manufacturing sector,” said Samuel Tombs, an economist at Capital Economics in London. “Despite today’s disappointing figures, we continue to think that the economic recovery will receive decent support from the industrial sector.”

The ONS said monthly data can fluctuate and manufacturing was up 1.1 percent in the three months through May compared with the previous quarter.

Out of 13 categories in manufacturing, 10 declined in May from the previous month, the statistics office said. The biggest contributors were basic metals, which decreased 2.3 percent, and pharmaceuticals, which slid 3.6 percent. From a year earlier, factory production rose 3.7 percent.

Pound Slides

The pound fell after the data were released and was 0.2 percent weaker at $1.7103 as of 10:31 a.m. London time, after reaching $1.7180 on July 4, the most since 2008. The currency slipped 0.1 percent to 79.54 pence per euro after touching 79.15 pence yesterday, the strongest level since September 2012.

The monthly drop in industrial output, which includes mining and quarrying and utilities, compared with the median forecast of 27 economists in a Bloomberg News survey for a 0.3 percent increase. As well as manufacturing, which makes up 10.4 percent of the economy, the decline was led by a 1.1 percent slide in water supply and waste management. Oil and gas extraction rose 0.9 percent, while utilities increased 3.8 percent.

‘Big Bounceback’

Industrial output increased 2.3 percent from a year earlier and was up 0.6 percent in the three months through May from the previous quarter.

Today’s data contrasts with a report from Markit Economics last week that showed U.K. manufacturing growth accelerated to the fastest pace in seven months in June as demand surged.

The figures are “unlikely to be a true reflection of what is happening in the sector,” said Rob Wood, an economist at Berenberg Bank and a former BOE official. It “is utterly at odds with strong survey readings. A big bounceback in output is possible next month,” he said.

Officials must “nurture the business confidence we are seeing at present by giving firms the security of working in a low interest-rate environment for the foreseeable future, with eventual rises both moderate and predictable,” BCC Director-General John Longworth said.

While economists forecast the BOE will keep the key rate at 0.5 percent on July 10, Governor Mark Carney has said the time to normalize rates is “edging closer.” Investors are betting the benchmark rate, which has been at an all-time low for more than five years, will rise 25 basis points by February, according to futures contracts.

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