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UK manufacturing jump shows economy ended 2016 strongly despite Brexit vote

LONDON (Reuters) - British manufacturing grew more strongly than expected in December, showing the economy remained resilient to the end of the year despite June’s Brexit vote shock, although 2017 looks likely to be more difficult.

A car hangs on the wall of Jaguar's Castle Bromwich manufacturing facility in Birmingham, Britain, November 17, 2016. REUTERS/Darren Staples

Official data released on Friday also showed the country’s smaller construction sector grew more quickly in December than many economists had forecast, while the trade deficit narrowed.

Britain’s economy was the strongest among the Group of Seven richest nations last year, confounding predictions of a sharp slowdown following the decision by voters to leave the European Union. But it is widely expected to slow this year as rising inflation eats into the spending power of consumers.

The Bank of England has signaled it is in no hurry to raise interest rates from their record low.

Sterling rose after Friday's data and British government bond futures FLGcv1 modestly extended losses.

“While industrial production and manufacturing output has proved resilient into the end of 2016, its sustainability over 2017 is in question,” Barclays economists Andrzej Szczepaniak and Fabrice Montagne said in a note to clients.

They pointed to soaring inflation pressures and the likelihood that potentially difficult negotiations with the EU will deter companies from making long-term investments.

British Prime Minister Theresa May is due to launch the process of leaving the EU by the end of March.

The main driver of Britain’s growth since in recent years has been the dominant services sector.

But Friday’s figures showed manufacturing grew strongly in the October-to-December period, up 1.2 percent from the previous three months, the strongest performance since June 23’s Brexit referendum.

In December, manufacturing output jumped by 2.1 percent, much more than the 0.5 percent rise forecast by a Reuters poll of economists.

However, the Office for National Statistics said the increase was due in large part to the often volatile pharmaceuticals sector.

Compared with December 2015, manufacturing was up 4.0 percent, the strongest increase since April 2014.

Industrial output overall rose 1.1 percent in December, stronger than expectations for a 0.2 percent increase in the Reuters poll, taking the year-on-year growth figure to 4.3 percent, the strongest since January 2011.

Britain’s construction sector also grew by more than expected, up 1.8 percent in December from November, helped by the building of houses and commercial property. The Reuters poll had predicted an increase of 1.0 percent.

The ONS said it was not revising its preliminary estimate that Britain’s economy grew by 0.6 percent in the fourth quarter of 2016.

Separate figures from the ONS showed Britain’s goods trade deficit fell to 10.89 billion pounds in December, narrower than a forecast of 11.50 billion pounds in the Reuters poll.

The ONS said the improvement was largely to due to exports of erratic items such as gold and aircraft parts and there was little evidence that the fall in the value of the pound since the Brexit vote was helping bring down the trade gap.

Excluding the volatile erratic items, Britain’s goods trade deficit widened in December.

Exports of British goods in terms of volume rather than value increased 7.1 percent in quarterly terms during December, however - the fastest growth since mid-2006.

Writing by William Schomberg, graphics by Jessica Wang,; Editing by Catherine Evans