‘The loss of steam has begun’: Economists react to UK industrial data

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Britain’s manufacturing sector led a broader slowdown in industrial output in March, raising more fears of a moderating growth in the UK economy the government has kick started its Brexit talks.

Month on month industrial production fell 0.5 per cent in March, with manufacturing slipping 0.6 per cent – worse than forecast and the third consecutive month of declines in both sectors.

Here’s what economists are making of the numbers:

Elizabeth Martins at HSBC said the soft March performance should not affect a 0.3 per cent Q1 GDP growth forecast for the UK, adding:

The question now is whether Q1 was an anomaly or the start of a longer lasting slowdown. The April PMIs point to a much stronger start to Q2 and underlying trade data suggest net exports are moving in the right direction. But other indicators, including weaker housing market data out today, suggest otherwise.

Output in the construction industry also declined by 0.7 per cent in March. Samuel Tombs at Pantheon notes the sector has been largely stagnant since last year’s referendum after three years of expansion. Still, a shortage of homes should still help up the parts of the industry, he said:

Looking ahead, shortages of existing homes coming on to the market and the Government’s Help to Buy Scheme should continue to support housebuilding.

The Government’s plans to invest more this year also will boost the infrastructure and public sectors. But with Brexit likely to cast a shadow over investment in industry and City office space, the construction sector still looks set for a tough year.

Andrzej Szczepaniak at Barclays said the latest batch of figures confirmed the economy’s “loss of steam has begun”.

The slowdown in the other production components reflects a more underlying trend related to Brexit. We now expect net trade to contribute -0.8pp to headline Q1 17 GDP growth, and for fixed investment to be neutral, for inventories to contribute +0.8pp, significantly higher than typically, while consumption is expected to contribute from 0.5pp in Q4 16 to 0.3pp in Q1 17.

As consumers scale back their spending from rising inflation, we expect activity to slow even further in Q2 17 and Q3 17, recovering only thereafter.

Separate figures on the UK’s trade performance also showed an unexpected widening in the country’s deficit in goods and services with the rest of the world from £2.7bn to £4.9bn, highlighting the mixed impact that a weaker currency has on exports and import performance.

Christian Jaccarini at the Centre for Economic and Business Research explains:

A weaker sterling makes imports more expensive for UK consumers and puts upward pressure on UK product prices through higher input costs.

This means that a weaker pound can increase both import and export prices, as seen in the second half of 2016. In March, as the pound’s value fell 1.3%, export and import prices increased by 1.5% and 1.4% respectively.

This continued rise in export prices explains in part why the pound’s weakness has not seen exports expand as much as anticipated.

Breaking down the trade figures, Scott Bowman at Capital Economics, notes tentative signs that the UK’s historical over-reliance on imports was shifting:

The three month growth rate of goods export volumes (excluding oil and erratics) having risen from 2.4% in December to 4.0% in March and growth in import volumes falling back from 3.4% to 2.4% over the same period.

And with the full benefits of exchange rate depreciation tending to come after a bit of a lag – surveys suggest that goods export volumes growth will accelerate further in the months ahead.

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