UK manufacturing output shrinks more than expected

UK manufacturing output is growing at the slowest rate since last summer, according to official figures released on Wednesday that came in well below forecast.

UK industrial production rose 0.1% in February compared to January, the Office for National Statistics revealed, well short of the 0.4% growth the market had expected and sharply lower than the 1.3% seen at the start of the year.

The reason for the slowdown was a 0.2% month-on-month fall in manufacturing production, undershooting forecasts for 0.2% growth and the 0.1% reported a month earlier. Compared to February last year, manufacturing production was up 2.5% when economists had pencilled in a 3.3% rise. January's yearly growth was revised to 2.2%.

IP was only in positive territory boosted by growth in the energy supply sector due to the colder than normal weather. Compared to last year, February's IP fell short of expectations, up 2.2% versus the 2.9% predicted, but higher than the revised 1.2% in January.

Partly the fall in manufacturing reflected a fall in the mining and quarrying sector, electrical appliances and oil refining, amid the planned closure of two of the six major oil refineries and the one-day closure of the Forties oil pipeline. This was only partly offset by increases in machinery, metal products and pharmaceuticals.

ONS head of national accounts, Darren Morgan, said manufacturing continued to grow in the three months to February but at the slowest rate seen since the summer.

"This drop in refining may have contributed to the fall in fuel exports and the large rise in fuel imports also seen in the three months to February."

ONS also put out construction output for February, which was down 1.6% on the month, better than the revised 3.1% drop in January but much worse than the 0.9% increase expected. On the year, construction output was down 3%, which was worse than the 2.5% drop predicted and the previous month's revised 2.1% fall.

Economist Samuel Tombs at Pantheon Macroeconomics said the poor manufacturing output was consistent with the message from the Markit and CBI surveys that growth has slowed this year.

"Total production likely will rise in March; we have pencilled in a 0.4% month-to-month gain," he said, noting average temperatures were even further below their seasonal norm in March than in February, with mining and quarrying output likely to have rebounded.

As a result, he sees total industrial production as likely to have increased by about 0.8% in the first quarter of 2018 compared to the end of 2017, causing its contribution to GDP growth to step up to 0.11 percentage points, from 0.07pp in Q4.

"But this won’t be enough to offset weakness in retail sales, consumer services spending and construction activity, all partly induced by the bad weather. All told, today’s data look consistent with GDP growth slowing to 0.2% in Q1 — below the MPC’s 0.3% forecast — from 0.4% in Q4, casting doubt over whether a May rate hike is as likely as markets currently expect."