Blow for UK recovery hopes as industrial output drops sharply

Published on Wednesday 10 March 2010 20:32

GORDON Brown's attempt to persuade voters yesterday that the government is steering a successful path to recovery was immediately thrown into doubt by official figures showing a sharp fall in industrial output in January.

Data from the Office for National Statistics (ONS) unveiled a 0.4 per cent drop in overall industrial activity during the month, surprising City economists who had predicted a 0.3 per cent rise.

The picture was particularly grim for manufacturers, who suffered a 0.9 per cent decline between December and January as Britain battled with adverse weather conditions.

The manufacturing slide marked the first drop in activity since August and came hot on the heels of concerning export data. On Tuesday, it was revealed that UK exports suffered their biggest fall in more than three years during January. Britain's trade gap widened from 7 billion to 8bn between December and January, raising alarm bells over the UK's GDP performance in the first quarter of this year.

Although more recent data for February has seen a turnaround in some sectors, economists are now warning that GDP figures for the first quarter are unlikely to show much progress compared to the closing three months of 2009, when the economy edged out of recession.

David Kern, chief economist at the British Chambers of Commerce, said: "The new figures were worse than expected, even making allowances for the adverse effect of January's bad weather.

"There is now a serious possibility that gross domestic product in the first quarter of this year will show a slowdown compared with the last quarter of 2009."

Howard Archer, chief European and UK economist at IHS Global Insight, said: "The appreciable drop in industrial production in January suggests that the sector will struggle to make a significant contribution to GDP growth in the first quarter, especially as it only accounts for 17.2 per cent of overall output. Furthermore, serious uncertainties remain about the demand for manufactured goods over the medium term, particularly once stimulative measures start being withdrawn."

The ONS figures were published just hours before the Prime Minister made a key speech on the economy ahead of the Budget on 24 March. Brown said that, contrary to warnings from economists, he believed Britain would hold on to its coveted AAA credit rating. However, the City remains unconvinced and a poll of 65 economists by Reuters yesterday showed a high level of uncertainty around Britain's ability to sustain the recovery.

The survey highlighted particular fears about what a hung parliament would herald for the economy.

Azad Zangana, European economist at Schroders Investment Management, said: "A hung parliament will mean it becomes very difficult for the ruling party to push through laws, but more critically, fiscal consolidation measures."