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Official figures reveal a 1.3% drop in UK factory output

08 July, 2014

Output from British factories fell by 1.3% in May – its biggest drop since January 2013 – according to figures released by the Office for National Statistics (ONS). Output for the year to May 2014 was up by 3.7%, compared to 4.3% in April.

The ONS figures are in contrast to generally positive signals from other indicators in recent months, and an expected 0.4% increase in output among analysts polled by Reuters.

Chris Williamson, chief economist with the analyst Markit, describes the ONS figures as “surprising” and suspects that it may be a “rogue” number, with the market rebounding in June.

But he says that that the drop “will add to arguments that the recovery remains too fragile for policymakers to be considering any tightening of policy”.

Williamson points out that the official figures “are volatile, and the more stable three-month trend rate of growth in the official data remains historically strong at 1.1%... Although down from 1.9% in the three months to April, this easing will not worry policymakers unduly, unless, of course, it is followed by a further slump in June.”

Williamson says there is a “striking” contrast between the weak official data for May and the powerful upturn signalled by the most recent manufacturing PMI (Purchasing Managers’ Index) survey. “Although the survey showed a slight easing in the rate of growth of factory output in June, the PMI suggests the sector saw the strongest quarterly growth for two decades in the second quarter. The UK also enjoyed the strongest improvement in manufacturing business conditions of all 27 countries for which PMI data were available in June.

“The PMI surveys collectively suggest that, with manufacturing growing strongly alongside buoyant construction and services sectors, the UK economy looks to have grown by 0.8% again in second quarter,” Williamson adds. “However, the ONS data suggest that growth may come in weaker than this. So far in the second quarter, manufacturing output is up just 0.3% on the first quarter. A strong rebound will be needed for June to bring the official data back into line with the survey signal of such robust growth being sustained in the second quarter.

“Although policymakers will most likely be minded to ‘look through’ the weakness in the volatile official data and focus instead on the more positive signals from the various business surveys, these data certainly add more confusion to the policy debate as to whether the Bank of England should start raising interest rates later this year rather than delaying until next year and risk a steeper series of rate hikes,” Williamson says.

Neil Prothero, deputy chief economist at EEF, the UK manufacturers’ organisation, says that that the dip in the ONS production figures “brings to an end a very strong run of data and serves as a reminder that manufacturers continue to face a number of headwinds, not least subdued external demand across Europe, which continues to weigh on export prospects. Monthly production data can be volatile and the dip in May contrasts with other positive surveys and healthy domestic order expectations.

“Despite the dip, manufacturing remains on track to expand for a fifth consecutive quarter,” he adds, “and anecdotal evidence from across the sector continues to point to solid momentum over the second half of the year.”

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