UK industrial production falls unexpectedly

A fall in manufacturing activity led to UK industrial production unexpectedly declining, according to official figures released on Friday that imply a further drag on national economic growth for the past quarter.

UK industrial production dropped 0.1% in May, the Office for National Statistics revealed, when a 0.4% rise had been expected after the 0.2% fall in April.

This was due to a 0.2% fall in manufacturing production for the second month in a row and the fourth monthly decline in the so far in 2017, reversing April’s increase and falling short of the market consensus for a 0.5% increase.

Year on year, industrial production was down 0.2%, following the 0.8% fall the previous month, again shy of the consensus estimate, which was for a 0.2% rise.

Manufacturing production was up 0.4% year on year but this was well short of the 1% expected.

UK construction output fell 1.2% on a seasonally adjusted basis when it had been forecast to rise 0.7% after a 1.6% fall in April. Year on year May was down 0.3% after a 0.6% YoY fall the month before.

Meanwhile, other ONS data showed the trade deficit widened by £2bn in the past three months, primarily due to high imports especially from outside the European Union.”

The ONS data release sent the pound shooting down 0.4% against the dollar to 1.2919 on Friday morning.

Senior statistician Kate Davies described activity in the production sector as "broadly unchanged", though acknowledging the "underlying position is weaker with both total output and manufacturing falling in the three months to May compared with the previous three months" and that the fall in construction output on a three-monthly basis followed several years of growth.

This was another set of disappointing output figures for the industrial and construction sectors in May that has widened the divergence between the very weak official data and much stronger business surveys, noted Howard Archer, chief economic advisor to the EY ITEM Club, who said he now expects weak gross domestic product growth for the second quarter.

With the negative readings for May coming on the back of several months of soft data, he said it was now "virtually certain" that both sectors will drag on GDP growth in the quarter.

“Based on today’s data and the business survey results for June, we now think that industrial production is likely to have contracted by 0.5% in Q2, with construction output down 1.8%. And though an improved performance from the services sector will provide some support, GDP is likely to have grown by just 0.3% with the risks to that projection skewed to the downside.”

Samuel Tombs at Pantheon Macroeconomics went further, doubting that GDP growth will have improved on Q1’s 0.2% rise, which he said would increase the likelihood that the Bank of England's rate setters will stand pat next month.

He noted that the fall in production partly reflected a 0.8% month-to-month fall in output in energy supply sector, due to unusually warm weather, with average temperatures were 1.8 degrees Celcius above their 1970-to-2016 May average, while mining and quarrying output rose by just 0.1% and water supply increased by 1.2%.

Looking to June, Tombs said the continuation of warmer-than-usual weather suggests that output in the energy supply sector will not recover fully from May’s decline, while estimates of production volumes at the start of the month point to lower output in June, although they had signalled a pickup in May.

"So even if the official manufacturing data start to narrow the gap with the surveys, overall production likely struggled to rise much in June," he added, anticipating a modest 0.4% month-to-month rise in production in June, which would leave it down 0.4% quarter-on-quarter.

"Production therefore would subtract 0.06 percentage points from quarter-on-quarter GDP growth in Q2. So, with construction output on course to have fallen in Q2 too and signs of a slowdown in the consumer services sector emerging from surveys, we doubt that GDP growth improved on Q1’s 0.2% rise in Q2."