Manufacturing and oil hit industrial production

Slower growth in the manufacturing sector and a drop in North Sea oil output dragged down UK industrial production in August, depressing the country’s third-quarter growth prospects. Despite this, growth looks on course to exceed the Bank of England’s forecast, increasing the chance that it will refrain from cutting interest rates or expanding asset purchases next month.

A series of new data during the past two weeks have suggested the UK economy performed better following the Brexit vote than early surveys had signalled. But growing optimism about the UK’s third-quarter growth prospects was tempered on Friday when the Office for National Statistics published figures showing industrial production declined by 0.4 per cent in August. Industrial production accounts for about 15 per cent of UK economic output.

Within that, manufacturing output increased by 0.2 per cent in August, with particularly strong growth in car production. But City analysts had expected a stronger bounceback after the 0.9 per cent fall in production in July. The growth in manufacturing was more than offset by a 3.7 per cent fall in oil and gas production, as a result of field shutdowns.

Other figures published by the ONS on Friday showed the UK’s trade deficit widened further in August, increasing to £4.7bn from £2.2bn in July. The July figure had been revised down substantially from the initial estimate of a £4.5bn deficit suggested a month ago.

There is little evidence so far of a boost to exports from the depreciation of sterling since the end of June. Exports of goods and services increased by just £0.1bn between July and August, which was dwarfed by a £2.6bn increase in imports.

However, Kate Davies, ONS senior statistician, said there was anecdotal evidence that some overseas buyers had increased their demand for UK-manufactured cars because of the weaker pound. This may take some time to feed through into measured exports.

James Warren, of the National Institute of Economic and Social Research, estimates “output from the production sector declined by 0.2 per cent” during the third quarter. Other analysts also expect a small decline or stagnation in the sector.

But the services sector, which makes up four-fifths of the UK economy, seems to have performed better. Services output grew by 0.4 per cent in July and survey data points to further growth in August and September.

As a result, Niesr estimates that output grew by 0.4 per cent in the third quarter, according to figures it published on Friday.

“Our estimates suggest that economic growth slowed in 2016 Q3,” said Mr Warren. “While retail sales have been buoyant in recent months, the production sector has acted as a drag on economic growth.”

If Mr Warren’s estimate is correct, this would bring UK economic growth in above the Bank of England’s latest forecast and increase the chance that members of the Monetary Policy Committee will vote to leave interest rates and the asset purchase programme unchanged at their meeting next month.

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In August the BoE forecast the economy would grow by just 0.1 per cent in the third quarter. At that time, a majority of members of the MPC said they were minded to cut rates further if economic growth was “broadly consistent” with their forecast.

Even though they revised up their expectation of growth to 0.2-0.3 per cent when they met in September, the MPC appeared not to consider this a material enough increase to change their view.

“The overall strength of recent data has probably lowered the chance of further monetary easing from the MPC,” said Scott Bowman, of Capital Economics. But “we still think that there is a decent chance that the bank rate will be cut to 0.1 per cent in November”, he added.

The two most hawkish members of the MPC — Kristin Forbes and Ian McCafferty — have already indicated they need further convincing that additional monetary loosening is required. Recent data are unlikely to have delivered that.

But other members of the MPC have been careful in recent weeks to leave open the possibility of further monetary policy action later in the year. What matters for monetary policy decisions is not short-run growth but the prospects for the UK economy and inflation during the next couple of years.

Both Michael Saunders, the committee’s newest member, and Ben Broadbent, a deputy governor, have signalled they could vote for a change in monetary policy even if economic growth does exceed the Bank’s latest forecast in the short term.

Mr Broadbent warned on Wednesday that “a lack of clarity about the UK’s future trading relationships needn’t result in visible, headline-grabbing closures of productive capacity”. Instead, the negative effects on economic activity could take longer to materialise. “Decisions to expand, that might otherwise have been taken, are delayed”, he said.


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