UPDATE 3-Manufacturing slip shows up Britain's uneven road to recovery

Tue Jul 9, 2013 10:37am EDT

* UK factory output posts unexpected 0.8 pct drop in May

* Fall contrasts with private-sector manufacturing surveys

* Economists say consumption, not exports, driving recovery

By William Schomberg and David Milliken

LONDON, July 9 (Reuters) - Britain's recovery from recession is turning out to be an uneven one and the government is still waiting for the shift to an export-driven economy it promised after the financial crisis.

Manufacturing shrank in May at its fastest pace since January and the country's trade deficit was its widest in six months, according to official data on Tuesday that tempered recent signs that growth was starting to pick up speed.

But three surveys published a few hours earlier showed rising house prices, improved business confidence and steady growth in retail sales.

And the International Monetary Fund raised its projection for growth in Britain to 0.9 percent this year, up 0.3 percentage points.

The different pace of recovery in different parts of the economy may be a consequence of the emergency stimulus measures taken by the Bank of England and the government, which have included support the housing market.

"This is a monetary-policy, low-rate, rising-consumption, rising-house-prices-driven recovery, so I don't expect the trade balance to improve very much," said Rob Wood, an economist at Berenberg Bank in London.

In 2011, finance minister George Osborne spoke of "a Britain carried aloft by the march of the makers" as he stressed the need to rebalance the economy away from reliance on public and private debt and more towards manufacturing.

Nonetheless, a combination of the crisis in the euro zone and the government's austerity push have left Britain still largely reliant on spending by its consumers, much of which is financed by credit. A sharp fall in sterling over the last few years has proved of little help to exporters.

Manufacturing shrank by 0.8 percent in May from April, the Office for National Statistics said, much weaker than forecasts for a 0.3 percent rise in a Reuters poll.

Output in the overall industrial sector - which makes up about 15 percent of Britain's economy - was also weaker than expected as it came in unchanged from April. It would have shrunk without the help of completed maintenance work which boosted oil and gas production.

"With the UK consumption outlook more positive as a result of the apparent turn-around in the housing market, the risks in the UK seem somewhat tilted to an old-school recovery built on consumer spending sucking in imports," said David Tinsley, UK economist at BNP Paribas.

STERLING FALLS AGAIN

Sterling fell to a four-month low against a basket of currencies and British government bond prices rallied after the data, which some investors said could bolster the case for more stimulus by the Bank of England.

The central bank announced no new bond-buying stimulus last week after the first policy meeting chaired by new governor Mark Carney, but it surprised markets by warning against premature expectations of an interest rate increase.

Now investors are waiting for Carney to spell out what kind of long-term guidance he will use to show markets, businesses and consumers how long interest rates are likely to stay at their record low of 0.5 percent, something which could help underpin domestic spending in the years ahead.

Economists have said Britain's gross domestic product is set to grow by about 0.5 or 0.6 percent in the second quarter, picking up a bit of speed from 0.3 percent in the first three months of the year. Berenberg's Wood said he was predicting growth of 0.4 percent in the April-June period.

The weak manufacturing numbers were a surprise given that a survey of purchasing managers found the sector had its best growth in more than two years in June. However, that is a month later than the period covered by Tuesday's release.

"Today's figures feel a little out of kilter with other industry data and what our manufacturing clients are telling us," said Mike Rigby, who manages Barclays' banking relationships with manufacturers.

The statistics office said Britain's goods trade deficit grew to 8.491 billion pounds ($12.68 billion) from 8.430 billion pounds in April. Economists had forecast 8.47 billion pounds.

Including Britain's surplus in trade in services, the overall trade deficit widened to 2.435 billion pounds. Monthly figures tend to be volatile, but over the three months to May, total exports were up 1.9 percent and imports grew 2.3 percent.

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