Fall In Factory Output Threatens Economic Recovery

A surprise fall in factory output has tempered hopes the UK economy enjoyed of a new year resurgence, contrasting with the upbeat tone of recent business surveys.

Official data showed manufacturing output suffered its biggest fall in almost a year in February, defying expectations for a small rise. The weakness was across the sector and left output down 1% on January, the Office for National Statistics said. That was the sharpest drop since April last year when an extra royal wedding bank holiday and the Japanese tsunami disrupted production.

On the year, output was down 1.4%, way off economists’ forecasts for a rise of 0.1% in both monthly and annual terms. January’s performance was also revised lower, casting doubts over hopes that overall economic growth bounced back strongly in the first quarter from an end of year dip.

“February’s terrible industrial production figures put something of dent in hopes of a decent increase in GDP in the first quarter,” said Samuel Tombs, economist at Capital Economics.

“Output has now fallen in four of the last five months, in contrast to the expansionary picture painted by the surveys… Hopes that manufacturing could help to drive a strong and sustained recovery in the economy are rapidly fading.”

The news is a blow to the government as it looks to manufacturers to kickstart Britain’s economic recovery and take on a bigger role in the economy, from the mere 10% they make up now.

The ONS said the wider industrial sector, which also includes utilities and mining, fared better in February when cold weather boosted oil, gas and electricity demand. Industrial output rose 0.4% on the month, slightly ahead of forecasts for a 0.3% rise.

The official numbers are at odds with stronger-than-expected surveys from businesses this week. The closely watched PMI (purchasing managers’ index) reports for all main sectors of the economy signalled a pick-up in activity last month. That prompted some economists to predict first-quarter GDP growth was as strong as 0.5%, more than making up for a 0.3% decline at the end of the last year. The first official estimate of GDP for January to March is released on 25 April.

“After a recent series of improved surveys on the UK economy, the unexpected sharp drop in manufacturing output in February is a sharp reminder that the economy still has its work cut out to return to sustainable decent growth,” commented Howard Archer, economist at IHS Global Insight.

“While we suspect that the manufacturing sector is in better shape than indicated by the February output data, it clearly does still face a challenging environment. Domestic demand for manufactured goods is still handicapped by a still appreciable squeeze on consumers’ purchasing power as well as by tighter public spending. Meanwhile, muted economic activity in the eurozone is limiting export orders although this is being countered by recently improved demand in south-east Asia, Japan and Africa, according to the purchasing managers.”

The pound weakened against other major currencies after the data was announced but it did not alter expectations that Bank of England will make no change to policy when it announces its latest decision at midday UK time. Interest rates are seen holding at the record low of 0.5% while no addition is expected for now to the Bank’s £325bn quantitative easing (QE) programme.

SOURCE: Guardian

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