UK shows ‘mixed picture’ as output rises, trade deficit widens

by BLOOMBERG

LondonA picture of an economy struggling to gain momentum emerged in UK figures published yesterday.

Industrial production rose 0.2% in August, boosted by a better than expected manufacturing performance, and construction clawed back some of the losses sustained in July, the Office for National Statistics (ONS) said. But the trade deficit unexpectedly widened to the most in almost a year as imports jumped.

The British economy has dropped to the bottom of the Group of Seven growth league since the vote to leave the European Union last year as political uncertainty and inflation took their toll on spending.

But while yesterday’s report paints what the ONS calls a “mixed picture”, it is unlikely to deter Bank of England policymakers who have hinted they are preparing to raise interest rates as early as November to combat

inflationary pressures. Manufacturing rose 0.4% in August, boosted by metals and pharmaceuticals, and construction output climbed 0.6% following a 1% decline in July. While industrial production is on course for a modest increase between July and September, construction is poised for a second straight quarter of contraction. Building output will fall unless September sees a gain of 1.9%, an increase last seen in December.

Net trade also seems likely to drag on growth, with little sign yet that the decline in the pound since the Brexit vote has delivered the kind of benefits that had been expected.

The deficit in goods and services climbed to £5.6 billion (RM31.19 billion) in August, meaning the shortfall will widen sharply in the third quarter (3Q) unless there is a near-unprecedented surplus in September. The deficit in goods alone hit an all-time high in August.

The increase was driven almost entirely by imports, suggesting the increased cost of foreign goods is failing to persuade British consumers to switch to cheaper domestic alternatives.

Manufacturing has been boosted by car production this year, but vehicle output fell in August. While that was partly due to maintenance shutdowns, industry figures last week show demand for cars is weakening. A separate survey this month showed the construction sector shrinking in September amid Brexit jitters.

Consumer confidence remains fragile and a surprise decline in services output in July dented hopes of a pick-up in the largest part of the economy in the 3Q.

Gross domestic product expanded less than 0.6% in the first half (1H) despite upward revisions to manufacturing and construction, and a similar pace of growth is widely predicted for the 2H of the year. — Bloomberg