Unexpected drop in UK manufacturing

British manufacturing output unexpectedly fell in January as computer and electronics production plunged.

Output declined 0.5% after a 0.1% increase in December, according to the Office for National Statistics. Economists in a Bloomberg News survey had forecast a 0.2% gain. The weakness reflected a 9.5% drop in electronics — the biggest in 13 years — after a surge in December because of a large defence contract.

Total industrial production, which accounts for about 15% of GDP, fell 0.1% in January, against an estimate for a 0.2% gain. The computer and electronics sector knocked 0.5 percentage points from output. From a year earlier, production rose 1.3%.

With the drop due to a one-time effect, the economy may have picked up again last month. Markit Economics said its manufacturing index rose to a seven-month high in February, and the British Chamber of Commerce yesterday raised its UK projections, though it said the recovery remains uneven.

“The eurozone is now picking up, which would be of appreciable help to export prospects,” said Howard Archer, an economist at IHS Global Insight in London. “However, the current strength of the pound against the euro is likely to be a matter of increasing concern to manufacturing exporters.”

The pound climbed for a seventh day against the euro, reaching its strongest level in more than seven years.

Oil and gas extraction jumped 2.4% in January from December, reflecting a partial restart of the Huntington North Sea oilfield and an increase in activity at other fields.

Chris Williamson, an economist at Markit, said that beyond the “noisy official data”, the underlying trend remains positive.

At Capital Economics, Paul Hollingsworth said that while survey evidence indicates a manufacturing pick-up is under way, “the emphasis will remain on the services sector to ensure that the overall economic recovery remains robust”.

In the three months through January, manufacturing rose 0.4% — a sixth consecutive quarterly increase — and total production was unchanged. On an annual basis, both have recorded 17 straight gains.

The Chamber of Commerce sees the UK economy expanding 0.7% this quarter, up from growth of 0.5% in the final three months of 2014. It forecasts 2.7% growth for the full year and 2.6% in 2016.

Weakness in the eurozone economy, Britain’s biggest trading partner, and the strength of the pound may act as drags on growth this year.

“While longer-term comparisons still show solid growth of just under 2% over the past year, there is little doubt that the manufacturing sector is facing major challenges,” said David Kern, a chief economist at the Chamber of Commerce.

— Bloomberg


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