UK rebalancing dealt a blow as industrial production falls

Data from the UK Office for National Statistics shows a sharp decrease in manufacturing output for the early part of this year, hit hard by the crisis in the steel industry. The fall confirms that the country has fallen back into recession; defined as a drop in production for two consecutive quarters. This is the third downturn within the decade and represents an unwelcome state of affairs for the UK Government, which is trying to rebalance the economy amid a turbulent global environment. Chief economist at the British Chambers of Commerce, David Kern, said it is "vital that the sector is given more support to compete against global and domestic headwinds” and particularly with the upcoming EU referendum creating uncertainty.

Government hopes of rebalancing the UK’s service-sector-dominated economy have been dealt a blow with the latest official data showing industry slipping into its third downturn within a decade.

A slight pickup in activity in March was not enough to offset sharp falls in output earlier in 2016 and meant production dropped for the second successive quarter – the definition of a recession.

The Office for National Statistics said industrial production – which is made up of manufacturing, mining and quarrying, North Sea oil and gas, water supply and the supply of electricity and gas – is 10% lower than it was when the UK entered recession in early 2008.

Manufacturing, which makes up 70% of industrial production, has been hard hit by the crisis in the steel sector, with output almost 2% lower in March 2016 than it was a year earlier. Manufacture of basic metals and metal production has dropped by 4% over the past year, contributing to the steepest fall in industrial production since May 2013.

City analysts said industry’s travails were likely to continue in the second quarter of 2016, with the impact of the looming EU referendum exacerbating the impact of weak global demand.



Chris Williamson, chief economist at Markit, said: “Surveys of manufacturing, services and construction point to GDP rising at an equivalent quarterly rate of 0.1% in April. Growth could be even weaker if the surveys disappoint in coming months, which seems probable given the intensifying uncertainty over the outcome of the EU referendum.”

David Kern, chief economist at the British Chambers of Commerce, warned that manufacturing remained in long-term decline, despite a modest recovery in March. “While adverse global conditions remain a major challenge for manufacturing, this is now being exacerbated by a slowdown in the domestic economy,” he said.

“A healthy manufacturing base remains critical to the wellbeing of the UK economy in key areas such as innovation, exports and productivity, making it vital that the sector is given more support to compete against global and domestic headwinds.”

Analysts had expected a more substantial 0.3% recovery since February after strong output figures from the car industry and an improvement in pharmaceuticals.

Figures from the Society of Motor Manufacturers and Traders for the first quarter of the year showed UK factories produced 443,581 cars, up 10.3% on same quarter last year. It was the strongest first-quarter performance since 2004.

The wider measure of industrial production, which includes mining, rose by 0.3% month on month but was only 0.1% higher than a year ago. Mining continued to decline in March, but an increase in energy production, attributed to the colder weather that arrived in the spring after a mild winter, pushed up industrial production overall.

Ruth Miller, a UK economist at Capital Economics, said the next few months would be tough but an improvement later in the year was likely as the lower pound helped exporters.

“While Brexit uncertainty may be partly to blame, the sector’s poor performance of late is certainly nothing new and many of the headwinds to growth in 2015 emanating from a weak global environment are still in place. But we still expect things to look up as the year progresses.

“Sterling’s recent depreciation and our expectations that global growth will pick up slightly in 2016 should allow the sector to return to modest growth later this year.”

