UK Preview: New Data to Show Sluggish Factory Growth

W B P Online:

Output in the UK manufacturing sector remains one of the most volatile from within the whole economy, as factories and exporters continue to struggle with stronger sterling exchange rates, and weaker global demand.

London – Economists expect factory production bounced back only very slightly in November, by 0.1% on a month-on-month basis, after posting a decline of 0.4% a month before. The total industrial production, which includes data on the extraction of oil and gas from the North Sea, is seen remaining flat between October and November, following a 0.1% rise a month before.

Despite the weaker-than-estimated monthly figures, the less volatile quarterly growth in the total industry picked up to 0.6% in the three months to October, while manufacturing output rose 0.4%, after falling 0.4% a quarter before. The Office for National Statistics is releasing November figures on Tuesday.

The UK industry group EEF published its factory outlook for this year in which it warned against significant movements in exchange rates; economic volatility in major markets; or uncertainty around the UK’s membership of the European Union (EU). Despite those challenges, UK manufacturers expect growth this year, although at a slower pace than last year.

The Bank of England (BoE) cited weaker global demand and a stronger sterling as headwinds to exports in its December survey of business conditions: “Manufacturing output growth had slowed as the strength of sterling and sluggish world growth had adversely affected export supply chains.”

The most recent depreciation of sterling, currently hovering near its five-year low against the US dollar, may be seen as positive by UK exporters and manufactures.

IHS Global Insight’s Howard Archer wrote in a note last week that “The pound’s weakening is very welcome news for UK exporters who have found sterling’s strength as a major handicap in recent times, and it will boost hopes that economic growth can finally become a little less dependent on domestic demand.”

Archer added that the BoE will also find the weaker pound helpful especially in helping to return inflation back up to target. “A weaker pound should help to lift inflation especially as oil and commodities are typically priced in dollars. It will also dilute Bank of England concern that any raising of interest rates could see sterling strengthen to uncomfortable highs,” Archer wrote.

According to Markit/CIPS PMI survey, business activity in UK factories unexpectedly slowed its pace to 51.9 in December, deteriorating further from the 2015 peak reached in October. The December survey showed price pressures remained notably suppressed at the end of 2015.

“If this ongoing mix of subdued growth and weak price pressures remains prevalent elsewhere in the economy, the Bank of England will likely continue to push any potential rate increase later into 2016,” Rob Dobson, senior economist at Markit, commented on the December PMI report.

The Confederation of British Industries (CBI) informed that manufactures saw some improvement in December as export orders picked up pace, but warned that the sector expected a mild contraction over the next three months. The total orders balance ticked up to -7%, from a negative 11% a month before.