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U.K. Industrial Output Falls Unexpectedly; Trade Gap Widens

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U.K. industrial production dropped unexpectedly and the visible trade gap widened to the highest level in a year in July largely due to a strong pound, suggesting a weak start to the third quarter.

Industrial output dropped 0.4 percent on a monthly basis in July, having had an equivalent fall in the prior month, the Office for National Statistics said Wednesday.

Economists had forecast 0.1 percent growth for July. This was the second consecutive fall in production.

Largely due to summer shutdowns at auto factories, manufacturing output declined 0.8 percent in July, the largest fall since May 2014. Economists had expected it to grow 0.2 percent again as seen in June.

Year-on-year, the growth in industrial production slowed notably to 0.8 percent in July from 1.5 percent in June. This was the weakest expansion in five months. Output was expected to grow 1.4 percent in July.

On the other hand, manufacturing output slid 0.5 percent annually, offsetting 0.5 percent increase in June. This was the first drop since August 2013, when it fell 1 percent. Economists had forecast a 0.5 percent growth for July.

Another report from ONS showed that the visible trade deficit widened for a second straight month in July.

The deficit on the trade in goods rose to GBP 11.08 billion from GBP 8.51 billion in June. Economists had forecast a GBP 9.5 billion shortfall.

The deficit figure was the biggest since the GBP 11.24 billion shortfall logged in July 2014.

Exports of goods fell to GBP 22.8 billion in July, the lowest since September 2010.

Exports decreased 9.2 percent from the prior month, logging the biggest fall since mid 2006. Meanwhile, imports grew GBP 0.3 billion to GBP 33.9 billion.

The surplus on services remained unchanged at GBP 7.7 billion in July. Consequently, the total trade deficit widened to GBP 3.4 billion from GBP 0.82 billion in June.

The widening was largely due to the increase in the visible trade deficit, the ONS said.

The non-EU trade deficit increased to a four-month high of GBP 3.46 billion from GBP 1.51 billion in June. Economists had forecast a shortfall of GBP 1.825 billion.

Paul Hollingsworth, a U.K. economist at Capital Economics, said industrial production and trade figures highlight that the strength of the pound and weakness in demand in key export markets held back the recovery in the manufacturing sector at the beginning of the third quarter.

The disappointing industrial production and trade data for July, coupled with falling import prices, dilutes the case for the Bank of England to hike interest rates in the near term.

The BoE is set to announce the outcome of the monetary policy meeting and its minutes on September 10. The bank is expected to keep its record low interest rate and GBP 375 billion quantitative easing unchanged at the meeting.

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