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Surprise drop in UK manufacturing jolts economic recovery Surprise drop in UK manufacturing output unlikely to derail recovery, says NIESR
(about 9 hours later)
Britain's factories appeared to down tools in May, resulting in a surprise fall in output which could affect the economic recovery in the second quarter. Britain's economic recovery accelerated in the second quarter despite a surprise fall in manufacturing output in May, according to a respected thinktank.
Production fell by 1.3% over the month, defying City expectations of a 0.4% rise and the biggest drop in 16 months. The figure for April was also revised down by the Office for National Statistics (ONS) to 0.3% growth from 0.4%. A poor performance in May brought to an end a five-month run of growth among UK manufacturers, the longest spell of expansion since 2010. The National Institute of Economic and Social Research (NIESR) said the unexpected drop in production would weigh "only marginally" on the wider economy, estimating a 0.9% rise in GDP between April and June, an improvement on the first quarter's 0.8% growth.
Simon Kirby of NIESR said: "We have to remember the manufacturing sector accounts for only 10% of the overall economy. In addition we expect the manufacturing sector to rebound in June, offsetting much of the drop in output in May."
The first official estimate of the second quarter will be published by the Office for National Statistics (ONS) on 25 July.
Economists were left baffled by the broad-based fall, with output down in 10 out of 13 sub-sectors. The biggest falls were reported by the makers of metals, pharmaceuticals, and electronics, which offset a rise in clothing manufacturing.Economists were left baffled by the broad-based fall, with output down in 10 out of 13 sub-sectors. The biggest falls were reported by the makers of metals, pharmaceuticals, and electronics, which offset a rise in clothing manufacturing.
Howard Archer, the chief UK economist at IHS Global Insight, said the figures were a nasty jolt for the economy after an extended run of largely good news.Howard Archer, the chief UK economist at IHS Global Insight, said the figures were a nasty jolt for the economy after an extended run of largely good news.
"It means that growth in the second quarter is now unlikely to have come in any higher than the 0.8% quarter-on-quarter rate seen in the first quarter. Indeed, growth could now have slowed slightly in the second quarter, although much will obviously depend on the dominant services sector." The first official estimate of GDP in the second quarter will be published on 25 July."It means that growth in the second quarter is now unlikely to have come in any higher than the 0.8% quarter-on-quarter rate seen in the first quarter. Indeed, growth could now have slowed slightly in the second quarter, although much will obviously depend on the dominant services sector." The first official estimate of GDP in the second quarter will be published on 25 July.
It was also a setback for the government's ambitions to rebalance the UK economy away from debt-fueled spending and financial services towards manufacturing and exports. It was also a setback for the government's ambitions to rebalance the UK economy away from debt-fuelled spending and financial services towards manufacturing and exports.
The weak manufacturing performance in May dragged the annual rate of growth in production down to 3.7% from 4.3%.The weak manufacturing performance in May dragged the annual rate of growth in production down to 3.7% from 4.3%.
Marc Ostwald, strategist at ADM Investor Services International, said: "One has to wonder whether the bell is tolling for the UK's economic 'Goldilocks' period." A Goldilocks period is one in which the economy is neither too hot nor too cold.Marc Ostwald, strategist at ADM Investor Services International, said: "One has to wonder whether the bell is tolling for the UK's economic 'Goldilocks' period." A Goldilocks period is one in which the economy is neither too hot nor too cold.
The ONS figures were markedly less upbeat than the recent data for the manufacturing sector from the Markit/CIPS PMI, a respected business survey but not official data.The ONS figures were markedly less upbeat than the recent data for the manufacturing sector from the Markit/CIPS PMI, a respected business survey but not official data.
The manufacturing PMI rose to 57.5 from 57.0 in May, where anything above 50 signals growth. The June figure was the highest since November and beating expectations in a Reuters poll. It also topped readings in other European countries.The manufacturing PMI rose to 57.5 from 57.0 in May, where anything above 50 signals growth. The June figure was the highest since November and beating expectations in a Reuters poll. It also topped readings in other European countries.
According to the ONS data published on Tuesday, the broader measure of industrial production – which includes mining and utilities – fell by 0.7% on a monthly basis, following 0.3% rise in April, again due to weak manufacturing. The annual rate slowed to 2.3% from 2.9% in April.According to the ONS data published on Tuesday, the broader measure of industrial production – which includes mining and utilities – fell by 0.7% on a monthly basis, following 0.3% rise in April, again due to weak manufacturing. The annual rate slowed to 2.3% from 2.9% in April.
Archer said that despite the drop in manufacturing output in May, the outlook for the sector looked good amid rising consumer confidence which should increase demand for manufacturers' goods. But he warned that the recent strengthening of the pound, driven by a brighter economic outlook and speculation of an early rise in interest rates, could become a headache for British factories because it makes UK goods more expensive abroad.Archer said that despite the drop in manufacturing output in May, the outlook for the sector looked good amid rising consumer confidence which should increase demand for manufacturers' goods. But he warned that the recent strengthening of the pound, driven by a brighter economic outlook and speculation of an early rise in interest rates, could become a headache for British factories because it makes UK goods more expensive abroad.
The weak data lessened the likelihood of an imminent rise in interest rates, economists said.The weak data lessened the likelihood of an imminent rise in interest rates, economists said.