U.K. Manufacturing Shrinks Most in a Year After Brexit Vote

Updated on
  • Pharmaceuticals, transport lead 0.9% decline in July
  • Industrial production rises 0.1%, boosted by oil and gas

U.K. manufacturers cut production at the fastest pace in a year in July as Brexit trauma rocked the British economy, a downturn that may prove short-lived.

Output fell 0.9 percent from June, far exceeding the 0.3 percent decline forecast in a Bloomberg survey, Office for National Statistics data published Wednesday show. Total industrial production rose 0.1 percent, thanks to a jump in oil and gas output.

The figures reflect the initial blow to confidence inflicted by the decision to quit the European Union. Nine of 13 manufacturing sectors saw output decline in July, led by pharmaceuticals and transport equipment, the ONS said.

However, key gauges of manufacturing and services both rebounded strongly in August, recent purchasing-manager surveys show, boosting hopes that Britain will avoid the recession predicted by some in the aftermath of the June 23 referendum.

The economy’s unexpected resilience has prompted traders to pare bets on another interest-rate cut this year and sent sterling to its highest trade-weighted level since July. Morgan Stanley, Credit Suisse Group AG and Goldman Sachs Group Inc. all revised up their U.K. economic forecasts this week.

Hard Data

Wednesday’s report represents the first full month of hard data on output in the third quarter. Figures on construction will be published on Friday, followed by the dominant services sector on Sept. 30.

The drop in factory output was the third in succession. Overall production was boosted by a 5.6 percent increase in oil and gas extraction along with higher output at utilities. Industrial production rose 2.1 percent from a year earlier, with manufacturing gaining 0.8 percent.

The pound was at $1.3361 as of 11 a.m. London time, down 0.6 percent since Tuesday. Despite recent gains, sterling remains more than 10 percent below its level before the referendum, providing a boost to exporters as British goods become cheaper on world markets.

While optimism is growing that growth this quarter will beat the 0.1 percent predicted by the Bank of England last month, companies and economists remain concerned about the outlook.

Negotiations over exiting from the EU have yet to get under way and there are signs that the euro region -- the destination for more than 40 percent of British exports -- is losing momentum. The sharp fall in sterling is also pushing up import costs and inflation, threatening to squeeze both consumer spending and profit margins.

“The future health of the manufacturing sector remains very uncertain,” said Chris Williamson, chief economist at Markit, which produces the monthly PMI surveys. “The overall picture of a flat economy in the third quarter so far also represents a somber picture compared to the robust growth seen prior to the referendum.”