Royal wedding slows manufacturing output

An unusual array of one-off factors helped push down industrial production sharply in April, including the royal wedding, the tsunami in Japan and the warmest weather for the time of year since records began.

Industrial production fell by 1.7 per cent in the month after a 0.2 per cent rise in March, the Office for National Statistics reported, the largest monthly fall in nearly two years. Economists had expected flat output.

The ONS said that “some or all” of the decline in production could be explained by companies shutting down for the extra royal wedding bank holiday and the cumulative effect of that coming close to the Easter weekend and May Day holiday.

In June 2002, when there was an extra bank holiday because of the Golden Jubilee celebrations, the index of production fell by 5.4 per cent, only to bounce back by 4.3 per cent the following month as companies restarted production lines. The business department has estimated that the Golden Jubilee took £2.5bn out of the economy.

A smaller decline this time due to a bank holiday might suggest that companies cannot rely on existing stocks and could not pull back on production that much, according to Neville Hill, economist at Credit Suisse.

The National Institute of Economic and Social Research estimated that the economy grew by 0.4 per cent in the three months to the end of May based on the industrial production figures.

“We expect to see a strong rebound over the next few months as these factors unwind,” said James Knightley, economist at ING Bank.

The construction sector also appeared to have suffered from the same effect as builders took time off over the period. Output fell by 13.8 per cent, not seasonally adjusted, in April after double digit rises in the previous two months.

Manufacturing production was 1.5 per cent lower in April than in March, the sharpest fall since 2008.

The ONS said the disaster in Japan was likely to have heavily disrupted supply chains for manufacturers, with motor vehicle production in particular suffering from a shortage of parts and declining by 7.1 per cent in the month.

The car industry has just received a boost after BMW pledged to invest £500m more in making Minis in the UK, safeguarding 5,000 jobs, and Nissan promised to invest £192m to build sports utility vehicles in Sunderland.

The exceptionally warm weather in April also played a part in reducing industrial output, with energy supply falling sharply as people switched off heaters. In April 2011, output in the electricity industry fell by 4.3 per cent and in gas by 11.2 per cent.

Although it is hard to gain a clear view of what was happening in industry in April because of the number of distortions, there are signs that the underlying performance in the sector has been weakening.

Output in manufacturing was little changed between January and March. Energy output has now entirely reversed a surge at the end of last year caused by cold weather and oil extraction in the North Sea is in secular decline. Global growth slowed in the early part of this year, which would drag on demand for manufactured goods, many of which are exported.

Separate surveys of manufacturing have also pointed to a slowdown this year. The closely watched purchasing managers index for the sector has shown a rapid weakening in growth, although surveys from the CBI and the EEF manufacturers’ group and evidence from the Bank of England’s regional agents have pointed to faster growth than has been seen historically in the sector.

The confusion over how much of the fall in manufacturing is due to one-off factors, or whether there is a true slowdown hitting the UK economy, is likely to make life more difficult for the Bank of England as it seeks to set monetary policy.

With inflation forecast to reach 5 per cent later this year, but consumer spending effectively in recession, deeper government cuts arriving and manufacturing uncertain, the Bank faces a particularly tricky decision on how to appear credible in combating inflation without upsetting the recovery.

The situation is made harder still by the fact that while second quarter growth figures are likely to be hit by the factors which have reduced industrial production in April, third quarter figures are likely to receive a boost from the bounceback, so it will not be until fourth quarter data – released at the end of January 2012 – that officials will have a clear view of the economy.

“Production will now have to bounce back pretty strongly in the remaining two months for industry to make a positive contribution to GDP growth in Q2 and recent surveys have pointed to some underlying slowdown in industry,” said Jonathan Loynes of Capital Economics.

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