UK industrial output stumble signals GDP slowdown

UK industrial output shrank in January as manufacturing activity slowed, official figures showed on Friday, which added to the expectation that the economy is heading for contraction in the first quarter.

UK industrial production shrank 0.4% in January compared to December, the Office for National Statistics said, less than the 0.5% decline forecast by economists but down from the previous month's 1.1% rise.

Compared to January last year, industrial production picked up 3.2%, as expected but down from the December's 4.3% increase.

Manufacturing production was down 0.9% month-on-month, worse than the 0.7% consensus forecast fall, following the previous 2.2%. Year-on-year, manufacturing output grew 2.7% versus the 2.9% consensus and the revised previous 4.2%.

The monthly fall was almost exclusively driven by a swing back for pharmaceuticals output after two strong months. But even if excluding pharmaceuticals, manufacturing output rose by just 0.1%, a clear slowdown from the previous two months.

Also released by ONS on Friday, construction output fell 0.4% versus a consensus for a drop of 0.2%, also deteriorating from the previous month's 1.8% improvement. On a yearly basis, construction grew 2.0%, well up on the 0.3% expected but slower than the revised previous 2.6%.

The ONS data dump followed last week's Markit/CIPS services purchasing manager's survey showed the services sector slowing to a five-month low.

Earlier this week, the Office for Budget Responsibility upgraded its forecast for gross domestic product growth for 2017 to 2% from the 1.8% growth recorded in 2016.

This is much higher than the European Commission estimate last month for a slowdown to 1.5%.

Exports underpin manufacturing

Looking underneath the headline decline, EEF, the manufacturers’ organisation, said if excluding the pharmaceutical contraction, the sector looked to be in good shape, underpinned by continued growth in exports.

EEF chief economist Lee Hopley added: "Recent indicators show the recovery we saw at the end of 2016 should continue in full swing over the early part of the year although this is not the time for complacency. With a risk-filled political calendar, the sector might be firmly on the road to recovery but it’s likely to be a bumpy ride."

Looking for positives, other ONS data released on Friday indicated the pound’s post-referendum slide is helping UK growth to become more balanced, said Ruth Gregory at Capital Economics, adding that after hefty rises at the end of last year manufacturing and construction still look on track to provide a slightly larger contribution to GDP growth in Q1 of 2017 than in Q4 of 2016, of about 0.2 percentage points.

Also announced by ONS on Friday, the overall trade in goods and services balance held steady at £2.0bn in January, while balance of trade data suggested the pound’s drop was having a positive impact, with the three-month growth rate of goods export volumes having risen from -1.9% in October to +8.7% in January and growth in import volumes having fallen from 4.3% to 1.6% over the same period.

UK GDP likely to decline in Q1

Economist Sam Tombs at Pantheon Macroeconomics said February's manufacturing PMI decline suggesting the strong burst of growth in the fourth quarter will not be repeated in the current quarter.

"Output appears to have been stimulated in Q4 by manufacturers replenishing stocks that they cut immediately after the referendum. Growth in industrial production also likely will be dampened in February by a fall in output in the energy supply sector due to another month of unusually mild weather," Tombs said.

Taking into account an expected fall back in mining and quarrying output, he felt the industrial sector was not likely to step up in the first quarter to offset a consumer-led slowdown in the services sector.

"What’s more, the pound’s slide should feed through to a further pick-up in the quarters ahead," said Gregory. "All in all then, not only do today’s figures add to the evidence that economic growth has maintained a decent pace at the start of the year but they also suggest that growth is starting to become better balanced."

Chris Williamson at IHS Markit said the rising export trend appeared to be the only major support to the economy at the moment.

"The fall in manufacturing output and construction activity in January follows news from the PMI surveys that the economy lost further growth momentum in February.

"The survey data point to the economy growing by 0.4% in the first quarter, down sharply from the solid 0.7% expansion seen at the end of last year."

Not only has the inflation squeeze begun to drag on service sector growth as consumers pulling back their spending, domestic demand for factory goods has also waned.

Said Williamson: "The sluggish growth signalled by the surveys and official data at the start of 2017 suggest that the economy is growing at only a modest pace in the first quarter, and looks susceptible to further weakening in coming months. Consumers will inevitably continue to rein in their spending amid higher prices and business uncertainty is likely to intensify as Article 50 is triggered, curbing corporate spending and hiring.

“The data suggest the Bank of England will adopt an increasingly dovish view in coming months, with rhetoric highlighting the downside risks to the economy posed by rising inflation and heightened political uncertainty.”