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Royal wedding, Japan quake hit UK output

Jun 10 2011 13:24 Reuters

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London - Factory output in Britain fell at its sharpest monthly pace in two years in April, hit by an extra holiday for the royal wedding and supply chain disruption from Japan's earthquake, and suggesting the economy made a lacklustre start to the second quarter.

The weak output data, together with news of a sharp slowdown in factories' input costs in May and a survey showing public inflation expectations fell for the first time in more than two years, reinforced the view that interest rates will stay on hold for several months to come.

The Office for National Statistics said industrial output fell 1.7% in April, confounding the median forecast for a rise of 0.1%, and the biggest fall since August 2009.

The narrower measure of manufacturing output - which does not include utilities or oil and gas extraction - dropped 1.5% in April, the steepest fall since January 2009.

However, some economists had expected an even bigger drop and gilt futures trimmed some of their early gains. Sterling initially fell to a session low against the dollar and the euro after the data, but quickly recouped most of those losses.

Analysts cautioned against reading too much into the figures, because of the one-off effects.

"It is difficult to interpret the current underlying trend in the sector from these figures, but there is plenty of evidence that growth is continuing to moderate," said Hetal Mehta, economist at Daiwa Capital Markets.

"We certainly do not expect manufacturing to make as big a contribution to GDP growth in Q2 as in Q1," she said.

Britain's manufacturing sector has been one of the few bright spots in the economy, benefiting from a past fall in the pound and robust demand from other countries.

However, recent surveys have indicated the sector may be running out of steam.

Price pressures easing

The Bank of England left interest rates at 0.5% on Thursday, as signs of a slowdown in some of Britain's main trading partners and weak domestic demand outweighed concerns about persistently high inflation.

There was some good news on the inflation front on Friday.

The Bank's May inflation attitudes survey showed that average public inflation expectations for the next 12 months fell for the first time since February 2009, dropping to 3.95% from 4.0% in the February 2011 survey.

The figures are likely to reassure the BoE that inflation expectations are not rising at a time when headline inflation has increased to a two-and-a-half year high of 4.5 percent, reducing the chances of an entrenched wages-price spiral.

Separate data from the ONS showed factory gate inflation eased in May, as manufacturers' input costs fell at their fastest monthly pace in two years.

Annual producer price inflation came in at 5.3 percent in May down from an upwardly revised 5.5% in April.

Friday's output figures suggest the economy made a weak start to the second quarter after growing by just 0.5% in the first three months of this year.

Construction output, which was one of the biggest drags on growth in the first three months of this year, fell by 13.8% on the month in April, according to unadjusted data published by the ONS.

The ONS said output had been hit by the extra public holiday for the Royal Wedding on April 29. In addition, it said car manufacturers had been affected by supply chain disruptions caused by Japan's earthquake and Tsunami in March. Record warm weather in April hit utilities output.
britain  |  japan  |  royal wedding
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