Recovery hopes dashed by shock manufacturing fall

Published on 07/07/2009 21:23

HOPES of an economic recovery were dealt a blow yesterday as it emerged that UK manufacturing output unexpectedly shrank in May.

Official figures showed output slipped 0.5 per cent between April and May, against forecasts for a 0.2 per cent rise.

The Office for National Statistics also revised down April's figures to show no change instead of the 0.2 per cent gain initially reported.

Economists were taken by surprise by the latest data and warned that the reversal in manufacturing growth would lead to renewed fears that the economy as a whole had continued to slump.

The worse-than-expected numbers also boosted expectations that the Bank of England will expand its 125 billion quantitative easing scheme this week as it attempts to haul Britain out of recession.

Howard Archer, chief UK and European economist at IHS Global Insight, said the manufacturing figures offered a "clear reminder that the economy is still in a very fragile state despite improving significantly from the lows seen in the first quarter".

He added that manufacturers still faced "serious obstacles" and that sustainable growth may be out of reach of the sector for some time to come.

The wider industrial production measure, which accounts for some 17 per cent of the UK economy, also fell, dropping 0.6 per cent against forecasts of a 0.2 per cent rise. The ONS said the monthly fall in output was driven by a 2 per cent decline in the paper, printing and publishing industries – sound recordings were particularly hit – and a 1.7 per cent fall in the machinery and equipment industries.

Hetal Mehta, senior economic advisor to the Ernst & Young Item Club, described yesterday's result as "disappointing".

"Despite the bounce back in car manufacturing, as car plants reopen, and an improvement in consumer durables, the rest of the manufacturing sector remains depressed," she said.

"While there are signs of a turnaround, as supported by survey data, it is clear that the economy will contract in Q2.

"However, after the severe contraction in Q1, the fall in Q2 GDP will be much milder – Item forecasts a 0.3 per cent decline."

Richard Snook, senior economist at the Centre for Economics and Business Research, added: "Today's figures will disappoint the markets. Nevertheless, we continue to expect that the worst of the credit crunch, which has proven devastating for the manufacturing sector, has now passed."

The downbeat manufacturing data followed this week's mixed assessment of the economy from the British Chambers of Commerce. Although the business group claimed the worst of the recession was over, it said talk of recovery was premature and unemployment would continue to head over the three million mark.

Think tank revises view that GDP growth resumed

BRITAIN'S economy shrank 0.4 per cent in the second quarter of this year, according to an influential economic think-tank, after yesterday's weak industrial output and manufacturing data forced it to rethink its view that GDP growth resumed in April.

The National Institute of Economic and Social Research (NIESR), which produces monthly estimates of gross domestic product growth, said revisions to official data last month suggested the recession had not reached its trough in March after all.

"However, on the basis of the monthly profile, we estimate that the UK economy is now stagnating rather than continuing to contract at a sharp pace," the organisation noted.

The NIESR hit the headlines last month when it proclaimed an end to the recession and said growth returned in April.

However, official data published last week showed GDP fell a sharper-than-estimated 2.4 per cent in the first three months of 2009 – the biggest fall in 50 years – due to heavy downward revisions to construction and services output.

Official estimates for GDP growth, or a lack of it, are due to be released later this summer.

The NIESR data is based on official statistics and private-sector surveys.