07242017

UK manufacturing output falls and trade deficit widens

UK car productionImage copyright
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The pound has fallen after disappointing manufacturing, trade and construction data suggested the UK economy is failing to gain momentum.

Output in both the manufacturing and construction sectors fell in May, according to the Office for National Statistics (ONS).

Separate data from the ONS showed that the UK’s trade deficit widened in May.

Sterling fell 0.7% against the dollar as analysts suggested an early interest rate rise was now less likely.

‘Losing momentum’

Recent weeks have seen speculation that the Bank of England could raise rates later this year.

This followed a surprisingly close vote on interest rate levels at the Bank’s last meeting, when three members of the Monetary Policy Committee backed a rate rise.

In addition, the Bank of England’s chief economist, Andy Haldane, said last week it needed “look seriously” at the possibility of raising interest rates to counter the recent pick-up in inflation.

However, reacting to the latest economic figures, Peter Dixon, an economist at Commerzbank, said: “It’s all building up a pattern here that says the economy is clearly losing momentum.

“It’s not pointing to a particularly dynamic second quarter. Under those circumstances, the timing of the hawks on the Monetary Policy Committee pushing for a rate hike doesn’t look great.”

Construction under pressure

The ONS figures showed that manufacturing output fell by 0.2% compared with April, whereas analysts had expected it to rise. The sector was hit by a 4.4% drop in car production – the biggest fall since February last year.

The wider measure of industrial output fell 0.1% following a 0.2% rise in April.

Construction output was also worse than expected. It fell by 1.2% in May from April, and was also down 1.2% in the three months to May – the sharpest such drop since October 2015.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics said: “The construction sector now is feeling acutely the adverse impact of Brexit uncertainty on the willingness of households and firms to make long-term financial commitments.

“It’s extremely unlikely that overall GDP growth accelerated in Q2 to the extent required to convince the Monetary Policy Committee (MPC) that higher interest rates are needed immediately.”

The trade figures showed that the UK’s total trade deficit in goods and services widened by £1bn to £3.1bn between April and May 2017.

In the three months to the end of May, the deficit widened to £8.9bn from £6.9bn in the previous quarter, which ONS senior statistician Kate Davies said was mainly due to “high imports especially from outside the European Union”.

The UK’s economy grew by 0.2% in the first three months of 2017, a sharp slowdown from the rate of 0.7% seen in the previous quarter.

The economy has been affected by a slowdown in the UK’s service sector, with indications that households are seeing their incomes squeezed by accelerating inflation.

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