September 8, 2017 / 11:27 AM / 10 months ago

UPDATE 1-UK economy's lethargy shows little sign of lifting

    * UK data suggests economy's modest showing continues in Q3
    * Factory output increases at fastest pace this year in July
    * But construction shrinks and trade lacklustre
    * British Chambers of Commerce says economy "treading water"

 (Recasts, adds reaction, graphics)
    By Andy Bruce and David Milliken
    LONDON, Sept 8 (Reuters) - Britain's Brexit-bound economy is
showing little sign that its leaden performance in the first
half of 2017 is improving much, despite hints of better times
for manufacturers in data released on Friday.
    Factory output increased at the fastest pace this year
during July, but this was set against a sharp decline in the
construction industry and another lacklustre month for trade.
    The official figures suggested the world's fifth-biggest
economy continued to lag the strong recovery in the euro zone
and is now growing slowly in the third quarter after suffering
its slowest first half of the year since 2012.
    Separately on Friday, the British Chambers of Commerce said
the economy was "treading water" ahead of Brexit, adding that
the pound's sharp fall since last year's vote to leave the
European Union had done more harm than good.
    That muted assessment was backed up by the official data
which showed little help for exporters from sterling's weakness.
    "The economy is clearly underperforming compared to what is
going on globally and regionally, but weakness in growth does
not appear to be intensifying," JPMorgan economist Malcolm Barr
    The Office for National Statistics said manufacturing output
rose 0.5 percent in July, above economists' forecasts in a
Reuters poll, after car production reversed a dip in the
previous month.
    But growth in the broader measure of industrial output
slowed to 0.2 percent, in line with forecasts as a lack of
summer maintenance of North Sea oil fields boosted production
more than usual for the time of year.
    The data suggested that the Bank of England, which holds its
next monetary policy meeting next week, will remain cautious
about raising interest rates despite an inflation rate heading
for 3 percent, above its 2 percent target.
    Business surveys over the last week suggested manufacturers
look set for a stronger end to the year, boosted by exports -
especially to the European Union.
    Still, official data have yet to reflect this.
    The ONS said Britain's trade deficit in goods edged up to
11.576 billion pounds ($15.24 billion) in July, the biggest
since March. Goods exports to the EU increased but this was
offset by a fall in exports to the rest of the world.
    In volume terms, goods exports in the three months to July
grew by 1.2 percent compared with the previous three months, the
weakest increase since October and showing little sign of a
boost from the pound's post-Brexit vote plunge.
    Rising inflation and slow wage growth is expected to weigh
on the economy throughout this year although the Bank of England
hopes that will be eased by stronger exports helped by the fall
in the value of the pound since the Brexit vote.
    The ONS also said construction output in July dropped by 0.9
percent on the month - the biggest drop in three months and
below all forecasts in the Reuters poll.
    On the year, output was 0.4 percent lower, and a sharp fall
in second quarter orders raises the prospect of further decline.

 (Editing by William Schomberg; editing by Ralph Boulton)
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