U.K. Factories, Builders Cut Output, Clouding Growth Outlook

Updated on
  • Manufacturing shrinks 0.2%, led by big decline in car output
  • Widening deficit raises questions about contribution of trade

U.K. factories and construction firms unexpectedly cut output in May, casting doubt over the performance of the economy in the second quarter.

Manufacturing fell 0.2 percent from April as vehicle production posted the biggest drop in more than a year, the Office for National Statistics said Friday. Total industrial production declined 0.1 percent. Building output shrank by 1.2 percent.

There was also disappointing news on trade, as the deficit widened more than expected to 3.1 billion pounds ($4 billion). Imports of goods rose 3.9 percent, far outstripping a 0.9 gain in exports.

The figures raise questions about the extent of any pickup in the economy after growth slumped to 0.2 percent in the first three months of the year. It strengthens the case for the Bank of England to refrain from raising interest rates, despite surging inflation.

The pound fell and was at $1.2909 as of 11:05 a.m. London time, down 0.5 percent on the day.

Political instability, the start of Brexit talks and the strain on consumers from the rising cost of living are weighing on the prospects for investment and consumer spending, with recent PMI surveys pointing to a loss of momentum going into the second half. Economists surveyed by Bloomberg last month saw growth accelerating to 0.4 percent between April and June.

The latest figures underline just how reliant Britain is on its giant services sector, itself coming under pressure from the fall in real incomes.

Questions Raised

Industrial production needs to expand by 1.4 percent in June, the most since November, to avoid shrinking in the second quarter. Output fell 1.2 percent between March and May and has gained in only one month this year.

Construction meanwhile would require an unprecedented expansion of 5.5 percent to break even during the quarter.

Whether the economy gets a boost from trade is also open to question. The deficit in the second quarter will widen if June sees a shortfall of more than 3.7 billion pounds.

Downward pressure on manufacturing in May came mostly from motor vehicles, which fell 4.4 percent, the most since February 2016. The ONS said it was not aware of any loss of production caused by maintenance.

Factories have had a lift from the sharp fall in the pound since the Brexit vote -- the value of goods’ exports rose an annual 16 percent in the first five months of 2017. But recent trade figures have been distorted by movements of non-monetary gold. An underlying measure, volumes excluding oil and erratic items, showed exports rising 6.6 percent.

(Adds pound decline in fifth paragraph.)
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