UK industrial production falls unexpectedly, ONS reveals

UK industrial output unexpectedly fell in October, according to official data released on Wednesday that revealed the sector's worst month since 2012.

The Office for National Statistics said that total industrial production in October decreased 1.3% compared to September, following on from a 0.4% drop a month ago, while production fell 1.1% versus October last year.

Economists had forecast a 0.2% month-on-month rise and a 0.5% annual increase.

ONS also revealed that manufacturing production fell 0.4% versus the consensus estimate of a 0.8% rise, while month-on-month the figure dropped 0.9% versus 0.2% forecast.

Mining and quarrying provided the largest downward pressure on industrial production, due to ongoing maintenance reducing production in the oil and gas extraction industry, including the closure of the Buzzard oil field in the North Sea reducing production.

Manufacturing decreases were broad-based across the sector, with the largest downward pressure coming from a 3.6% drop from pharmaceuticals.

Although recent manufacturing PMI surveys from Markit/CIPS suggest output in the sector will bounce back in the coming months, sterling dropped on the news, falling 0.58% to $1.2604 and 0.67% to €1.1749.

"The UK manufacturing data came much weaker than expectations and this presents a major threat for the economy," said analyst Naeem Aslam at Think Markets.

"So far investors have been of the mind frame that the country is overcoming its major economic headwinds but today's number clearly shows how much off beat they are with respect to reality. It is important to keep in mind that manufacturing represents nearly 70% of the production index."

Scott Bowman at Capital Economics said that after a decline in the third quarter, the sector had began the final quarter on a very weak footing and will probably subtract from GDP growth.

"This means that the dominant services sector will be relied upon once more to ensure that overall GDP growth doesn’t slow too much, following the solid 0.5% expansion experienced in Q3," he said.

"However, beyond Q4, the outlook for the sector appears brighter. The maintenance-related contractions in oil production should prove temporary and the recent rise in oil prices could encourage more output. What’s more, surveys shows that export orders have already risen due to the fall in the pound since the leave vote, which should flow though to increases in manufacturing production in time."

Barclays said said there was the potential for some upside in industrial production and manufacturing output, noting the fine balance as inflationary pressures sit at multi-year highs, with an export-driven boost from the pound's depreciation and an adverse impact of input prices.

"Further, as we enter the first half of 2017, when it is anticipated that Article 50 will be triggered, we expect firms to become more cautious in light of a lack of clarity regarding Britain’s negotiation strategy and the aimed for post-exit relationship between the UK and the EU and the rest of the world," economists at the bank said.